With this issue we launch “The Buzz” – a short summary of the major and relevant topics of interest in Central and Eastern Europe, provided by those best positioned to know: law firm partners and journalists on the ground in each CEE country.
Belarus
“(Mostly) Business friendly changes in the market”
On July 1, a new anti-monopoly law was introduced in the Belarusian market. The completely new law brings several “interesting and welcomed” changes. First, it introduced excemptions for intra-group restructurings from competition authority clearance requirements. In particular, the approval of the antimonopoly authority is no longer required for transactions between company and their affiliates that control more than 50% of their parents’ voting shares. Furthermore, the new legislation now allows for certain types of vertical agreements (which were previously banned). In particular, a vertical agreement is lawful and permissible if: (a) the restriction with respect to the price of goods relates to the maximum resale price only; or (b) the restriction on selling goods of competitors is provided for under a franchise contract or another contract for organization of sale under a certain trademark; or (c) market share of each party to a vertical agreement does not exceed 15 per cent.
A positive sign also came under in the form of a Presidential Edict on July 17, which targeted agricultural cooperatives (called “Kolkhoz”). The country’s president, Alexander Lukashenko, has decided to reorganize the hundreds of agricultural cooperatives into joint stock companies, unitary companies, or limited liability companies. No rationale was provided for the move, but it may be a means of attracting investors into the Kolkhoz since their current set-up does not allow for selling of shares. The deadline set for the reorganization is December 31, 2016, following which investor interest in the cooperatives is expected to increase considerably.
The one “less business friendly” update from the market is the prohibition imposed by the National Bank on June 25 on salaries being paid in foreign currencies. This follows a recent revamp of the labor code and will affect the employees of representative offices of foreign firms in particular who “will likely be unhappy, especially in light of the depreciation rates of the local currency.”
Bulgaria
“No big developments that we can be proud of unfortunately..”
Bulgaria has been plagued by political instability for the last couple of months. Following protests that commenced as soon as the government came into power, Bulgarian Prime Minister Plamen Oresharski submitted the resignation of his government to the National Assembly, effective as of July 24.
The political instability was exacerbated by a series of clashes between two local oligarchs — Tsvetan Vasilev and Delyan Peevski — that have led to a recent bank run.
One notable aspect to keep an eye on in the near future is the limitation on offshore companies coming into force in January (though compliance was not required until the end of June). Specifically, such companies are prohibited from participating in 26 industries — or, if they do, they need to disclose in full their beneficiaries — which has the capital markets worried at the moment. Several positive amendments were proposed but with the ongoing political deadlock it is uncertain when they will be voted on.
At the same time, the energy market has its eyes fixed on the ongoing dispute between regulators and the three main electrical distributors in the country accused of abusing their dominant position on the local market. In April, the State Energy and Water Regulatory Commission (SEWRC) launched a procedure to revoke the licenses of the three following a notification by the state-owned power utility NEK that they owe it a total of over EUR 178 million in outstanding payments.
In terms of the legal markets itself, no notable movements are taking place, a result of the general slow-down tied to the current state of affairs.
Croatia
“PPP/Infrastructure work makes for a busy holiday season”
The main work keeping Croatian lawyers busy revolves around PPP/Infrastructure projects. Road networks seem to be the main focus at the moment, including an announced monetization program through privatizations due to commence in early fall.
Other projects include several “old fashioned concession renewal proceedings” planed to kick start soon as well as several tourism projects-related tenders in the pipeline such as the one related to the 4000 people capacity old resort near Dubrovnik.
The upcoming IPO of the state-owned port of Rjeka, the biggest port of Croatia, is another one that the market is keeping a close eye on.
Hungary
“Points 1, 2, 3 and 10 on everyone’s agenda are the banks”
The dire situation of the banking sector in Hungary and the recently passed Bank Act is THE number one topic of conversation around the water-tank. The radical Act comes as the proposed solution to a long-standing issue in the market. As for the past 10 years it was preferable to take out loans in foreign currency (especially CHF) due to considerably lower interest rates. Fluctuations in the exchange rates, however, found holders of such loans often having to pay back several times what they originally calculated. This prompted lengthy negotiations between the Government and Bank Associations and individual banks to reduce the number of borrowers involved. Slow progress – combined with a desire for a hasty finish to the debate – resulted in the recently enacted piece of legislation, which may well result in hundreds of litigations being launched against the Hungarian State.
The piece of legislation “ultimately changed the concept of law”, as “while in every jurisdiction out there the basic concept is that, if a claim is made, there is a burden on the claimant to prove his/her case against the defendant, the new Act turns that logic upside-down.” The Act establishes a presumption of unfairness of certain provisions of consumer loan contracts which means that it is assumed, by default, that most of the loan contracts concluded by banks in the country were invalid, unless they sue the Hungarian State to build a case otherwise. This has financial institutions scrambling at the moment to take on the gargantuan effort of reviewing their portfolio of loans from the last decade and build their cases. Some predict that, cornered in this manner, many of the over 400 large banks and smaller institutions will file a suit against the State.
Matters are made worse by the extremely tight deadlines set in place. Banks have until August 25 to file their claims. Approximately 300 Judges are assigned to process the expected avalanche of cases, with each case having to be heard on an expedited basis. By “expedited”, the Act states that the courts can only postpone the hearing once for up to 7 days and the first instance court should render its judgment within 30 days. Banks will have only another 8 days to appeal the first instance decision. The deadlines are so strict that the legislator decided to avoid risking delays at the post office and the courts will deliver all decisions physically.
Romania
“Considerable banking consolidations with more to come”
According to Perry Zizzi, Partner at Dentons in Romania, the market is witnessing a surprisingly large amount of banking M&A transactions with UniCredit Tiriac Bank acquiring the corporate business of RBS Romania, the Romania branch of The Royal Bank of Scotland, and Banco Comercial Portugues, the largest bank in Portugal, selling Millennium Bank to OTP being just some of the latest deals. At the same time, large market players such as Banca Transilvania have announced they are “scouting the market.”
There’s likely to be increase in the number of non-performing loan portfolio transactions in the market such as Volskbank Romania’s sale of a EUR 495 million portfolio of non-performing loans to a consortium of foreign investors consisting of Deutsche Bank, AnaCap Financial Partners, H.I.G Capital International Advisers, and APS Holding SE. This was expected for quite a while in the market but even when the crisis hit no one was interested in either selling or buying. Now a “critical mass” seems to have been hit, prompting bank management teams to decide to get them out of their books.
Another sector to keep an eye on is the energy market with Italian energy company Enel’s announcement to sell its holdings in Romania (and in Slovakia) by the end of the year. At the same time, the Romanian Government announced a new development strategy in July, which aims to attract a strategic investor that can bring share capital in order to complete the Nuclear Power plant ‘EnergoNuclear’, currently owned wholly by state-run Nuclearelectrica following the gradual pullout of ArcelorMittal Galati, Enel, GdF Suez, RWE, and Iberdrola — all initial owners of the EnergoNuclear project.
Russia
“Buzzwords: Sanctions and Penalties”
In the previous issue of the CEE Legal Matters magazine, sanctions imposed on Russia were described as “the 800 pound gorilla in the room.” Though apparently shrinking at the time, the gorilla has since grown to twice its previous size. As a response, Russia announced import bans on products from the EU. As this issue went to print, the European Union seems set on filing appeals with the World Trade Organization (WTO) after the announcement.
The market was also shaken by the unanimous July 18, 2014 holding of the Arbitral Tribunal in The Hague that the Russian Federation had breached its international obligations under the Energy Charter Treaty by destroying the Yukos Oil Company and appropriating its assets. The USD 50 billion penalty imposed on the country was followed by the European Court of Human Rights awarding the shareholders an additional EUR 1.86 billion in damages in a lawsuit filed against the Russian tax authorities.
Russian Senator Konstantin Dobrynin has called for an urgent audit of all international contracts, treaties, charters, conventions, in order to identify their compliance with national law, their necessity for the country, as well as potential damages and risks of their use in the future subsequently to make recommendations on their possible denunciation.
Slovenia
“Everyone holding breath on privatizations”
In June 2014 the National Assembly confirmed a list of 15 state-owned companies waiting to be privatized. In the beginning of July, just before elections, the existing government adopted a resolution to temporarily put on hold any final decision on the ongoing privatization of Telekom Slovenije and Aerodrom Ljubljana. Later the resolution was canceled, enabling the privatization process to continue. The winners of the general elections submitted a draft version of the Coalition Agreement for review, which called for a “thoughtfully considered, strategic and controlled approach to privatization of state-owned companies.”
The big deal in the market in the last two months was the sale of 53% share capital of Mercator to Agrokor. In the EUR 240 million deal, RPPP acted for Agrokor, while Kavcic, Rogl, Bracun represented the sellers. Involved in the related restructurings were RPPP, Slaughter and May, Schoenherr, Clifford Chance, and Jadek & Pensa. RPPP and Karanovic & Nikolic assisted in obtaining competition clearances.
At the same time, Slovenian state-owned Elektrogospodarstvo Slovenije (EGS) opened an investment dispute with ICSID against Bosnia and Herzegovina. EGS contributed funds for the construction of the Ugljevik thermal power plant in BiH pursuant to agreements signed in the 1980s. The deal entitled EGS to a revalued amount of the invested funds and a share of the plant’s electricity output. However, the Bosnian war in the 1990s disrupted work on the project and the second unit was never built. The plant is now owned by RiTE Ugljevik, which is controlled by the government of Republika Srpska. EGS is now seeking to recover funds invested in the construction as well as for the compensation of undelivered electricity in the amount of approximately EUR 700 million.
Lastly, the country’s finances took a blow with a orderfrom the European Court of Human Rights that it reimburse the clients of now-defunct banks who lost their savings when Yugoslavia collapsed. According to media, the country now has to pay around EUR 500 million to savers at Sarajevo and Zagreb bank branches of Ljubljanska banka in what is regarded as a pilot case, with likely others to follow.
Serbia
“A wave of reforms and a hot summer in Belgrade”
The Serbian market is buzzing over a wave of reforms brought forth by the Government aiming to create a better environment for foreign investment.
On July 21, the Serbian Parliament passed a set of amendments to the country’s Labor Code. The main changes relate to an increased flexibility in employment agreements, with the approach being hailed by employers while – “luckily, or unluckily, depending on the perspective” – potential opposition such as employee syndicates too weak to put up much of a fight against the “progressive amendments.” This is good news for law firms as well, as their Labor teams should be busy in the next 6 months (the set timeline for companies to adapt to the new legislation) assisting clients in updating employment agreements, collective agreements, labor bylaws, etc.
Other reforms on the parliamentary pipeline revolve around the privatization and bankruptcy laws in the country. On the latter, new mechanisms will be introduced to facilitate the restructuring and the tender processes of non-profitable companies as well as a commitment from the current government to engage strategic investors in PPPs and joint ventures. Furthermore, a new set of media laws particularly pushing for media pluralism will likely lead to state-owned media outlets being privatized. At the same time, the proposed bankruptcy amendments aim to increase transparency in the recovery mechanisms for creditors.
While the start of the year felt slower than usual, Belgrade is registering a very “hot summer” in terms of the deals going on in the market. Following Etihad’s investment into Air Serbia last year, it seems like there is a great deal of interest in the market from Arab investors, particularly in agriculture, food processing plants, and infrastructure (including the Belgrade Waterfront, which – at a reported EUR 3 billion – will be one of the largest projects for the next few years).
The one big question mark at the moment, in light of the current events in Ukraine, is the future of the South Stream planned gas pipeline, meant to transport Russian natural gas through the Black Sea to Bulgaria and through Serbia.
Turkey
“Foreign financial institutions not happy in Turkey”
The “hottest topic” in the market lately has been the total prohibition imposed by the Turkish Central Bank on foreign revolving cash facilities utilized by Turkish residents for their businesses in Turkey. The radical change was not made public via normal channels (it was not published in the Official Gazette). Rather, it was introduced as a simple note, which, for example, the Esin Banking Team “stumbled upon only while working on a deal.” Despite its rather humble introduction, it will “dramatically reshape the market” and lawyers’ telephones are ringing constantly at the moment from clients to trying to understand what exceptions there are to the ban — the answer, unfortunately, is none.
It is not only the banking industry that is being shaken up in the market these days. The end of June saw the implementation of regulations requiring international electronic money and payment services to establish themselves in the market if they wish to continue operating in it. Although they were previously able to operate freely in the market, they now need not only to set up actual Turkish entities but also set up full operations, including local servers, in order to comply with country regulations, which will likely be quite burdensome.
The M&A market is also quite intense, powered by “a considerable amount of work on privatizations and strategic investments especially by financial institutions.”
Thank you!
We thank the following for sharing their opinions and analysis on the news:
- Belarus: Sergei Makarchuk, Advocate/Chairman of the Board, CHSH Cerha Hempel Spiegelfeld Hlawati;
- Bulgaria: Borislav Boyanov, Managing Partner, Boyanov & Co.;
- Croatia: Sasa Divjak, Managing Partner, Divjak, Topic & Bahtijarevic;
- Hungary: Akos Eros, Managing Partner – Budapest, Squire Patton Boggs;
- Romania: Perry Zizzi, Partner, Dentons;
- Russia: RAPSI;
- Serbia: Milica Subotic, Partner, JPM Jankovic Popovic Mitic;
- Slovenia: Ales Rojs, Managing Partner, Rojs, Peljhan, Prelesnik & partnerji (RPPP); and
- Turkey: Muhsin Keskin, Partner, Esin Attorney Partnership (Baker & Mckenzie).
