New frontiers, old problems

By bne IntelliNews August 2, 2012

Nicholas Watson in Prague -

Halil Matoshi is one of Kosova's best known journalists and an outspoken critic of corruption in the government. In July, he was just leaving a cultural event in Pristina when he was jumped by at least four men who attacked him with knives. Matoshi managed to fight off his assailants and despite being wounded, made it to the local hospital. Dunja Mijatovic, the OSCE representative for freedom of the media, says that Matoshi was lucky to survive, as the attack could have been "fatal" - many journalists working in in what investors call frontier markets are not so lucky.

Such incidents are a depressingly - and some would argue increasingly - familiar tale from journalists working in these frontier markets of Central and Eastern Europe/Commonwealth of Independent States (CEE/CIS). And Kosovo is by no means one of the worst. In Freedom House's "Worst of the Worst" annual list of the world's most oppressive societies, published in July, two countries from the CEE/CIS region (Turkmenistan and Uzbekistan) appear in the report's total of nine. While two others, Belarus and South Ossetia, are on a further list of 10 countries that are on the cusp of being the worst of the worst.

Brutal dictatorships today rule almost a quarter of the world's population and are deeply entrenched, says Freedom House, meaning that more than 1.6bn people have no say in how they are governed and face severe consequences if they try to exercise their most basic rights, such as expressing their views, assembling peacefully and organising independently of the state. "The regimes, sadly, are very durable. They have lasted on average for more than 37 years without any meaningful transfers of power to competing political parties," says Daniel Calingaert, vice president of policy and external affairs at Freedom House. "Our report serves as a call to action for the international community to focus on the countries that perpetrate the most egregious human rights abuses."

What is particularly disheartening for the people and businesses in these countries is that all of them have, at some point, showed some signs of opening up over the past decade before reverting to their old ways. (Please see bne's Frontiers Market Special Report.)

The bad old days

After Turkmenistan's late and unlamented dictator Saparmurad Niyazov - better known as Turkmenbashi, or "father of the Turkmens" - died under mysterious circumstances in 2005, there were high hopes that the new president, Gurbanguly Berdymukhamedov, would allow some political freedoms and liberalise the economy. However, in February the former dentist was re-elected president with over 97% of the vote in sham elections - a margin of victory that was not that far below Niyazov's 99% in 1992, which led to Turkmenbashi proclaiming himself "president for life".

In what can only be described as a bad joke, the Turkmen government decided to create some political "competition" in May and set up a second party - perhaps as a way to reduce the chances of an "Arab Spring"-style revolution happening - and placed adverts in the national press calling for volunteers, according to RIA Novosti. It is not known how many signed up to the new opposition, but one would have to be a brave soul to show even the merest hint of opposition tendencies in a country that routinely jails and tortures its opponents. "There is little hope that the newly re-elected Turkmen leader will opt for reforms in his second term," Lilit Gevorgyan, Russia/CIS analyst at IHS Global Insight, believes. "There are no prospects of decentralising political power in the country; both legislative and executive branches will remain firmly under Berdymukhamedov's control. His main focus will be on developing the energy sector, diversifying energy export routes and dealing with inter-elite rivalry."

Then there's Uzbekistan, which has been under the iron grip of President Islam Karimov since independence in 1991. It had looked as though the regime was making a tentative move towards greater openness when legislation was passed in March 2011 giving more powers to the Uzbek parliament. Yet the government subsequently crushed those hopes over the following months by throwing out an international NGO, forcing several international investors to shut down and denouncing western rock as "devil music". "Uzbekistan's government suppressed all political opposition and restricted independent business activity in 2011, and the few remaining civic activists and critical journalists in the country faced prosecution, hefty fines and arbitrary detention," Freedom House notes.

This schizophrenic attitude to reform continued this year, when in April Karimov signed a decree, "On additional measures to stimulate foreign direct investments", which includes additional tax breaks for foreign investors as well as a pledge that the government would refrain from interfering in their businesses. Yet in July, Russia's largest mobile telecommunications firm Mobile TeleSystems (MTS) was forced to stop providing services in Uzbekistan after its license was suspended for 10 days. The company is also being targeted by the Uzbekistani General Prosecutor's Office, which has issued arrest warrants for the arrest of several top managers at its Uzbek subsidiary as part of a fraud probe.

MTS is, incidentally, a prime example of a foreign investor that has taken the plunge into these frontier markets only to have its fingers burnt in Turkmenistan and Kyrgyzstan, as well as now in Uzbekistan.

Belarus too had appeared to be on a path designed to rid itself of the label "the last dictatorship in Europe", before President Alexander Lukashenko stole the presidential election in December 2010 and the regime cracked down on the subsequent protests. Most visibly, three former presidential candidates received prison terms of five years or more for their roles in the demonstrations. But Lukashenko managed to alienate everyone by ignoring calls for clemency from all of Europe (including Russia) and ordering the execution of Dmitry Konovalov and Vladislav Kovalyov in March for allegedly setting a bombing in Minsk's metro on the basis of questionable evidence, according to Human Rights Watch. Belarus is the only country in Europe with a functioning death penalty.

The years since have seen continued political repression, a confused attitude to liberalising the economy, an economic crisis, and growing corruption fed by the state's dominance of the economy and the overall lack of transparency and accountability in government.

The economy has since stabilised, thanks in part to a $3bn bailout from the Russian-led Eurasian Economic Community, a grouping of ex-Soviet states. However, an annual $2.5bn privatisation programme that was a condition for the aid remains, like all economic matters, under the purview of President Lukashenko, who seems unable to make up his mind on the issue. Apart from the sale of a 50% stake in Beltransgaz to Russian gas giant Gazprom for $2.5bn in November, the government's plans for the privatisation of major state-owned enterprises remain unclear.

According to bne sources, the Belarusian government drew up a preliminary list of major state-owned assets for privatisation that could secure this annual revenue. Publicly this list remains undisclosed - and in May vice-PM Siarhei Rumas denied even the existence of this list, according to BelarusDigest - but sources say it comprises about 20 major state-owned assets, including Naftan oil refinery, Gomeltransneft Druzhba oil pipeline, Krinitsa brewery, Belarusian Metal Plant foundry, BelAZ truck maker, cement plants and the state shareholding in mobile operator MTS.

The governor of the National Bank of the Republic of Belarus, Nadezhda Ermakova, >told bne in May that the government was ready to embark on the process of selling the country's state-run banks, starting with Paritetbank, the smallest of the four state-owned lenders, in a tender to be held during the second half of the year. The deal could be the first of several in the country's banking sector over the next year. VTB (Belarus), the subsidiary of Russia's VTB Bank, wants to buy the 25.9% interest that the Belarusian state currently owns in the lender through state oil and chemistry concern Belneftekhim. Belarus' central bank has also suggested that Russia's VTB Bank sell its Belarus' subsidiary, Moscow-Minsk Bank, to the Belarusian government so it can then merge it with state-owned Belinvestbank to beef up the institution.

However, parliamentary elections are planned for September and few think the government will opt to pursue such a time-consuming and risky strategy as selling off state assets; instead, it appears to be returning to traditional methods of securing an electoral victory by clamping down on dissent and promising dramatic wage increases - exactly the type of policies that could plunge the economy back into crisis.

Yet for all that, there have been hopeful signs for investors elsewhere in the CEE/CIS region.

Free and fair

The Western Balkan region is slowly showing signs of normalising, notwithstanding the many issues that still need to be resolved. Serbia in May voted for a president who was a former key member of the country's ultra-nationalist party, yet Tomislav Nikolic ran on a pro-EU platform and a commitment to negotiating a peaceful resolution to the issue of its erstwhile province but now independent Kosovo. In Albania, the parliament on July 19 approved key electoral pushed by the EU that should dramatically improve the political climate there.

In June, Mongolia held parliamentary elections that while scrappy, still showed what Julian Dierkes, an associate professor at the University of British Columbia's Institute of Asian Research, called an electorate exercising their rights and institutions that are growing better at meeting people's demands. "While Mongolia's democracy is a work in progress like most liberal systems of governance, many Mongolians continue to be dedicated to the task of building a durable democracy," says Dierkes. "The first thing to note about the vote... is that both the polling and the aftermath have been largely peaceful. This is progress compared to the last vote four years ago."

Most encouragingly, he says, the election results are being honoured by all, with the generally pro-business Democratic Party saying in July it's ready to form a coalition government with smaller populist parties, thus taking over power from the previous coalition led by the Mongolian People's Party. "This smooth transition once again proves Mongolia's status as the only post-socialist democracy in Asia," says Dierkes.

Over the next four years, the country's vast mineral wealth will be exploited and the state coffers will begin to fill, making this incoming government key for the economy and investors. "The importance of this next term cannot be overstated," says Travis Hamilton, founder of the Khan Mongolia Equities Fund, who remains bullish overall on Mongolia's economic and investment future.

Kyrgyzstan too, no stranger to rigged elections and ethnic strife, continues its march toward becoming a parliamentary democracy, with the first free-and-fair parliamentary elections held in October 2010 followed by a similarly fair presidential election a year later in October 2011.

Unfortunately, the country epitomises the region's patchy progress in improving conditions for investors amid a more general backward slide. On June 27, the Kyrgyz parliament passed a resolution to revise the operating licence belonging to the Canadian miner Centerra's flagship Kumtor gold mine. Among other things, the resolution calls for changes to the tax regime and concession area at Kumtor, while boosting the government's stake in the mine. The resolution followed the release nine days earlier of an 800-page parliamentary report that accuses the mine of environmental damage on a massive scale. Centerra CEO Ian Atkinson says the report's findings are "without merit" and the mine has operated in full compliance with Kyrgyz and international standards, "and this has been proven over the years in systematic audits by Kyrgyz and international experts."

The effect of this continual uncertainty over Centerra's operations (where its title over the mine has been questioned several times in the past) and the reduced output is already impacting on the economy. The mine accounts for around 12% of the country's annual GDP, which shrank by 5.6% on year in the first half of this year.

The uneven nature of this progress can be frustrating for frontier investors. However, regional moves are afoot that could lay the foundations for a more general, widespread and enduring improvement in the investor environment in the CIS.

Kyrgyzstan is expected to be the next country to join the Customs Union formed by Russia, Belarus and Kazakhstan that came into being on January 1, 2010. The three members are moving rapidly towards closer economic unity, which will morph into a Common Economic Space (CES) by 2015, where companies will be free to move to any of the member countries and enjoy exactly the same business and trade conditions. "We are creating a huge market that will encompass over 165m consumers, with unified legislation and the free flow of capital, services and labour," Russian President Vladimir Putin has said of the ambitious plans.

The culmination of this process, Putin declares, will be a Eurasian Economic Union to rival that of the EU. And while the EU's problems today are legion, even its harshest detractors don't deny the benefits the bloc has brought to regional trade on the European continent and as a driver for countries in CEE to transform their economies. If the same can be achieved in the CIS with the Eurasian Economic Union, frontier investors will have to find a new playground. That time, though, is still a long way off.

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