Women’s work Risky business On the rebound Going to town

Senior female How Fortum is dealing Nursing sick companies Enterprising cities
executives in CEE on with post-acquisition back to health with put themselves
their rise to the top integration in Russia corporate turnarounds on the map

Transform Issue
Issue
4/Summer
3/Spring 2009

New frontiers
Pulling ahead
with innovation
The solutions to the challenges
facing your business are out there.
You just need to know where to look.*

Sometimes it’s hard to know where to start.

In Central and Eastern Europe,
PricewaterhouseCoopers has
7,600 experienced professionals who
provide industry focused assurance,
advisory and tax services to the region’s
leading companies. We focus on your key
business issues, providing you with
innovative strategic solutions, positioning
your business at the top of the league.

*connectedthinking
© 2009 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

PricewaterhouseCoopers
CEO Central and Eastern Europe:
Mike Kubena
Managing Partner Advisory in CEE:
Mark Okes-Voysey
Managing Partner Assurance in CEE:
Nick Brasington
Managing Partner Tax & Legal Services
in CEE:
Steven Snaith
PwC Contributing Editor:
Donall O’Shea
Published by Bladonmore Media Ltd
Editor-in-chief: Richard Rivlin
Editor: Eila Rana
Managing editor: Sean Kearns
Sub-editor: Lynne Densham
cover image: getty images
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PricewaterhouseCoopers
Editorial
letter
R
ecently, I have spent time with clients throughout the region and a
question that seems to often emerge in conversation is about the
key characteristics of the leaders and managers who can win out in
these chaotic times. The answer I give has three parts: the best leaders of
organisations combine resilient operating skills, access to deep levels of
financial understanding and an ability to make decisions. These leaders have
a sense of urgency to manage for the short term within the context of a longer
term strategic plan that stands up to scrutiny, whatever state the economy is in.
Internally I have created a shorthand for it: it is a blend of finding opportunity,
minding numbers and grinding performance. I am convinced the next year will
be one for the finders, minders and grinders to take centre stage.
Good businesses do not automatically go bad when times become tough and
great leaders do not cower when the economic temperature is turned down.
They face up to the challenges of the moment and get smarter. What does that
mean? Fresh time must be spent on product definition, providing customers
with what they want today as opposed to repeating what you offered yesterday.
Extra time and investment should go into sales and marketing to repair and
energise pipelines and leaders need to summon extra levels of effort from
colleagues and teams to get the attention of existing customers and new ones.
Operational and financial data provide leaders and managers with the basic
information they need to take the key decisions, but there is no substitution for
sound and timely judgment. History highlights how these moments can become
times of great opportunities for those able to take the right calculated risks and
to manage effectively throughout the downturn. PwC is your business partner
for the good and the less good times.
This is the fourth issue of Transform and we are keen to know what you think
about the magazine. Please spare a few minutes to fill in our online reader
response survey at www.pwc.com/transform. Your feedback will be immensely
valuable in helping us to continue to improve Transform so that it remains
relevant and interesting to you.
Mike Kubena
3
Contents
6 Upfront
Redefining the chief information officer’s role; prospects for East
to West mergers and acquisitions; PwC Russia partner Cherie
Ford on the impact of The Last Word on Power by Tracy Goss;
conversations with Levon Hampartzoumian, CEO of UniCredit
Bulbank, and Joanna Simonowicz, a PwC director in Poland;
and corporate tax reductions across CEE
capturing deal value
26 In from the cold
Fortum’s expansion into Russia has given the Finnish energy
company a toehold in a burgeoning market but first it must deal
with transparency and compliance issues

developing talent
technology & it
30 Female intuition
10 Future dreams Leading businesswomen in the CEE region are finding
Strong education systems and entrepreneurial drive combine few barriers to success, and they believe that any lack of
to provide a firm foundation for the CEE region to become a representation at senior levels requires individual rather than
centre of innovation institutionalised solutions

16 26

16 Small is beautiful
Nanotechnology may involve dealing with matter at a micro
level, but its impact on the economy of Russia could be huge,
enabling the country to fulfil its ambition of becoming a global
leader in the field

22 Net gains
E-government services are increasingly seen as a way of
meeting the need to improve public services in CEE, but take-
up is often poor. Consulting citizens first could be the solution

30 36

4

business recovery
SPecial Report
43 Swimming against the tide?
Distressed companies in CEE are discovering that one of
the consequences of the global credit crisis is an increased
threat of fraudulent behaviour by employees
44 Back to life
The worsening economic crisis is increasing the need
for corporate turnarounds in CEE. But a shortage of
business recovery experts can cause difficulties
50 Flow motion
Although effective cash management is a high priority
for most companies in a downturn, businesses in CEE
have to face additional challenges in tackling this issue
53 Divest to avoid distress
The difficult decision to divest could be eased for
companies in CEE by the benefits brought about by
focusing on core business areas
44
PricewaterhouseCoopers
growth in cee
36 A fresh start
Thanks to innovative leaders, Baia Mare in Romania
and Ekaterinburg in Russia are showing other
ambitious cities how to create new reputations in
order to attract investors
54 DATA CENTRE
A focus on economic facts and figures from across
the CEE region
Cesar Bacani was the personal finance editor and senior
business editor at Asiaweek. The author of The China Investor:
Getting Rich with the Next Superpower, he is also a former
contributing editor for CFO Asia and CFO China, two specialist
magazines published by The Economist Group until March
this year, and an experienced speaker on investing in China
and China-related equities. A graduate of the University of the
Philippines, he is an award-winning poet and a former university
lecturer.
Don Durfee is the former editor of CFO Asia and CFO China.
He joined in January 2007 as managing editor after several
years with CFO magazine in New York. He was a senior editor
with the Economist Intelligence Unit. Before that, he served as
the managing editor of the Alliance Analyst.
Charles Orton-Jones is a freelance business journalist,
specialising in entrepreneurship and small businesses. He is
the former editor of EuroBusiness magazine and deputy editor
of Real Business magazine. He has written for the Guardian,
Financial Management, Real FD, The Marketer and the CBI’s
magazine, Business Voice.
Scott Payton is a regular contributor to numerous publications
including Spectator Business, The Spectator, Financial
Management, Accountancy and Accounting & Business. He
is also the editor of Linklaters Quarterly and former editor of
Business Voice and Real IR.
Ben Schiller is a freelance journalist. Previously, he was a
correspondent in San Francisco and Prague, and the editor of
EBF, a European management review. He writes frequently for
the Financial Times, Business Voice, and other publications.
Elliot Wilson is an associate editor of Spectator Business and
Hong Kong’s Asiamoney magazines. He also writes for The
Spectator and Euromoney.
5
upfront>
From the network
CIO of the future
The role of the chief information
CIOs are in an officer (CIO) is changing

ideal position fundamentally. As the one senior

executive who knows how the
to “help define business works from one end to the
and execute other, the CIO has the potential to

forward-looking take on a more strategic role, says

I for Innovation, a recent PwC report.
business CIOs are in an ideal position to “help
strategies” define and execute forward-looking
business strategies” by using IT to
drive the business. There are some
signs of this starting to happen in
CEE, says Grigory Katsman, senior
manager at PwC in Russia. He cites
the example of a Russian energy
company, which has an ambitious
young CIO who, with PwC’s help, is
both building new IT functions and
leading business strategies.

Push and pull

While the CIO’s role is expanding
and becoming more complex,
one aspect is likely to simplify:
technology. Several trends, including
commoditisation, consolidation
and outsourcing, are converging
to enable companies to pass on
the management of technology
infrastructure to consultants or
contractors. However, it is early
days. Katsman says: “In CEE there
is a lot of talk about these trends,
especially commoditisation, but not
so much action.”
Many CIOs feel their role is to
juggle an ever-increasing number of
balls and this is a matter of growing
concern to CEE businesses. “In
more than 50% of our projects, our
clients raise this problem and ask
us to help,” says Katsman.
masterfile

I for Innovation can be downloaded

at www.pwc.com.

6

Trend watch
East to West M&A
The small but previously fast-growing trend
for emerging markets companies to acquire
targets from western economies has slowed
down as the global downturn continues.
“Activity in CEE has gone much quieter
over the last three to four months,” says Chris
Hemmings, global head of corporate finance
at PwC and the author of two reports on the
East to West M&A trend: Going West… and
Eastern Approaches…
This is a development that is being
played out in Kazakhstan where, pre-credit
crunch, investment in acquisitions from more
developed economies had grown 10-fold since
2004 to $18bn.
Since the downturn, natural resource-
rich Kazakhstan’s ability to invest has been
impacted by the fall in oil prices and demand,
and the fall in commodity prices.
“This does not mean long-term prospects
are not good,” says Alper Akdeniz, managing
partner for Central Asia and the Caucasus
at PwC. “In fact, for a country such as
Kazakhstan, with the kind of resources that it
has I would expect investment in its immediate
region, as well as in Europe, to pick up again.”
Hemmings agrees, adding that emerging
economies will come out of the downturn
faster than the likes of the UK. The question is,
when? He predicts that CEE will start pulling
out of the downturn in Q2 of 2010, one year
later than other emerging economies such
as the BRIC countries and Latin America but
that is simply because CEE was hit by the
slowdown before them.
What should CEE acquirers do in the
interim? Historically, corporate defaults tend
to occur around 12 months after a downturn.
“CEE companies need to be clear about their
five-year business plan so that they can move
quickly when those defaults come onto the
market,” Hemmings advises.
PricewaterhouseCoopers
Between The Covers
Transformation
Tracy Goss’s The Last Word on Power [Broadway
Business, 1985] helped Cherie Ford, a partner in
PwC Russia’s M&A practice (pictured), realise
the difference between change and real
transformation. Here, she explains how.
What made you read The Last Word on Power?
I’ve been focused over the past several years
on trying to find balance and peace in my life. I
have three kids, a big job and I live in a tough place
– Moscow. I read Eckhart Tolle’s The Power of Now
and it had a profound impact on me. He speaks about
being present in the now, not in the
past or the future. I started to read
business books that focused on this
same philosophy.
What are Goss’s key messages?
Change is a function of altering what
you are doing – improving something
that is already possible in your reality.
Transformation is a function of altering the way you are
being – creating something that is currently not possible
in your reality. To be a leader who can transform an
organisation, you need to start with yourself.
What is the best lesson this book has taught you?
Things are as they are. Learning to let go of past
experience as a bias to current challenge has been very
empowering. It changes the dynamic of discussions
and gives you the ability to stand in someone else’s
shoes. Hearing their perspective with an open mind,
being present with the situation at hand is the only way
in numbers to make a truly great transformation.
$18bn Have you changed anything about the way you work
since reading this book?
I listen more, though no doubt I am still a work in
progress. I approach a situation with a clean sheet
The figure of paper rather than a preconceived notion of what I
to which the think it should be. I leave the past in the past and don’t
value of overseas make judgments. When making decisions, I don’t try to
acquisitions by predict the future but focus on what is needed now.
Kazakh companies
has grown
since 2004
7
upfront>

where are they now?

Levon Hampartzoumian,
Chairman and CEO, UniCredit Bulbank

As chairman and CEO of Bulgaria’s corruption and my challenge was to

UniCredit Bulbank, Levon
Hampartzoumian is well placed to
steer the bank through the wave of
company bankruptcies and surge
in credit defaults that he recently
predicted. He says the early part of
his career, as director of business
development and management
consulting at PwC Bulgaria, gave
him a strong foundation in the many
qualities needed to be an effective
banker. “Being part of the PwC
team gave me the opportunity to
work in a thoroughly international
environment and have access to
know-how,” he says.
His journey from PwC to UniCredit
Bulbank has been a fascinating
one, taking in a spell as Bulgaria’s
Deputy Minister of Economy and
some time as head of Sofia’s
Privatization Agency. “It was an
agency torn by public scandals, lack
of communication and suspicions of
change all this,” he says.
Today, Hampartzoumian’s
challenge is to support loyal clients
and keep employees motivated
as he guides his bank through the
global economic turmoil. Does he
find his PwC heritage useful? “PwC
is a company that develops lots
of leaders – our alumni are now in
top positions in government or the
economic field,” he says.
“Being part of the
PwC team gave
me the opportunity
to work in a
thoroughly
international
environment”

8
From the network
Tax update
PwC’s worldwide tax summaries
have recently been updated online.
January 2009 marked the start of
many corporate tax reductions
across CEE. For more details,
visit www.taxsummaries.pwc.com
Estonia
0%
Complete abolishment of
withholding tax on dividends.
Kazakhstan
12%
Kazakhstan’s standard VAT rate as
of January 2009, down from 13% in 2008.
russia
20%
Russia’s corporate profits tax rate,
reduced from 24%, from January 2009.
Hungary
100%
The amount of income arising from
activities of a foreign PE (permanent
establishment) of a Hungarian company
that is exempt from local business
tax, if such a PE is subject to similar
local entrepreneurial tax in the foreign
country, from February 2009.
PricewaterhouseCoopers
90 seconds with...
Joanna Simonowicz
Joanna Simonowicz, a partner in the
Transaction Services group in Poland,
started out as an auditor at PwC in
1997. After two years, she switched
to transactions and due diligence,
becoming one of the first people in
Poland to work in this area, which
helps companies make acquisitions,
divestments and strategic alliances.
Since 2005, she has worked with
private equity clients to build their
presence in Poland and the CEE
region. She predicts a more complex
transactions market ahead.
What aspects of the job do you
especially enjoy?
I really enjoy working with the
client from the very beginning
when they explain their plans for the
transaction – it’s like starting a new
adventure. Initially, the client can be
quite distant because they don’t know
you but by the end they are calling you
every day to get your advice, and
bringing you into negotiations.
How do the needs of private equity
and corporate clients differ?
Private equity clients are more
proactive and relationship-driven
than corporate clients. Work is
constant whether there is a transaction
or not – with relationship building, for
example. They are financial investors
so they know less about the market;
they need help with commercial and
“By the end, the
client is calling you
every day to get
your advice”
Joanna Simonowicz
partner, pwc
operational due diligence as well as
financial due diligence. Also, they
are always looking for deal ideas so
this is another area where you can
add value.
What are the forthcoming
challenges for those dealing
in transactions?
Lots of changes are occurring
at the moment, which will make
the market increasingly complex.
There are more and more distressed
companies – but it’s not enough now
to buy and hope, especially for
private equity clients. They must
ensure they integrate and
restructure to add value. Some
major private equity players will not
survive – this is a real change in the
landscape. Another challenge is to
identify new market trends. People
are looking at public-to-private and
distressed M&A, both areas in
which we have expertise.
9
 technology & IT
T
he global growth of
Graphisoft illustrates how
far a bright idea can take
a CEE company. Founded in
Budapest in 1982, the firm is
now one of the world’s largest
architecture, engineering and
construction software providers,
and eastern Europe’s most
successful software company.
Graphisoft’s global expansion
began in 1988 with the launch of
an office in Germany – Europe’s
largest computer-aided design
market. A year later the company
opened for business in San
Francisco. A Tokyo office followed
in 1994, with UK and Spanish
operations launching in 1997.
Graphisoft’s international success
offers a key lesson for other
CEE technology companies to
learn from, says Akos Pfemeter,
director of global marketing at the
company: think globally rather
than locally. “Hungary was a
closed country when Graphisoft
was founded. Most Hungarian
companies looked only as far as
Germany for market opportunities.
We thought that we should look
further, to the global economy,”
he says. “This has enabled us to
learn much more, as well as to
seize more opportunities.”
But how do innovation-focused
companies in CEE measure up to
their counterparts elsewhere? And
what challenges must businesses,
investors and governments
overcome before CEE can unlock
photolibrary
its full innovation potential?
Businesses undoubtedly
benefit from the region’s greatest
10
innovation assets – its academic
institutions and cultural emphasis
on the value of education.
“There is a strong culture of
science in CEE countries,” says
Dr Per Högselius, author of the
2005 book The Dynamics of
Innovation in Eastern Europe:
Lessons from Estonia and
researcher at Stockholm’s Royal
Institute of Technology. “If you
travel around the region, you will
find science and technology being
frequently discussed in the media.
It’s part of society. And a very
high percentage of the population
– 90% in most CEE countries –
has a secondary level education.
This is something that most other
countries with comparable GDP
levels can only dream about, and
is very important for innovation
and technology.”
This culture of science
consistently produces people
“If you travel around CEE, you
will find science and technology
being frequently discussed in the
media. It’s part of society”
dr per högselius, researcher, royal
institute of technology, stockholm
with world-class software
programming and engineering
skills. Additionally, today’s
CEE university graduates have
grown up in an environment of
rapid societal and economic
development, says Högselius,
referring to the changes that have
 The development of an entrepreneurial spirit
combined with a well-educated population
could see CEE countries becoming
innovation powerhouses
words: Scott Payton

future
dreams

PricewaterhouseCoopers 11
 taken place in the region since
the late 1980s. This means young
people here are hungry to do new
things, he adds.
The real challenge for CEE
is to turn this hunger into real
commercial activity. The October
2008 Economist Intelligence
Unit (EIU) report, A Time for
New Ideas: Innovation in Central
Eastern Europe and Turkey,
highlights the point.
“We found that, with the
exception of Slovenia, the
investment going into innovation
– what we call the innovation
inputs – was not delivering the
expected number of patents, or
innovation outputs, so something
in the process is not working
effectively,” says author Paul
Lewis, managing editor of the
EIU’s Executive Briefing.
This disconnect between what
gets invented in the lab and what
gets sold in the marketplace is
leading to one of the biggest
getty images
12
“Hubs of technological
development similar to Silicon
Valley are starting to spring up in
CEE, such as in Dubna”
martijn peeters, director, pwc
threats to innovation activity in
the CEE region – the so-called
brain drain. “Many talented
people are migrating to more
developed countries, particularly
the US. The region has the
innovation potential, but we
must work hard to keep it,” says
Graphisoft’s Pfemeter.
There are signs that the
link between innovation and
commercial activity is improving. In
2008, a number of CEE countries
saw a growth in the number of
US patents registered, including
Poland, the Czech Republic and
Hungary (see table, opposite).
How can the region build on
this? By creating “innovation
Blast off: Kazakhstan’s first
satellite launches from Russia’s
Baikonur cosmodrome in
Kazakhstan in 2006
ecosystems”, says Christopher
Wasden, the leader of PwC’s
innovation practice in New
York. “You need to develop the
incentives that get the academic
centres to collaborate with both
the entrepreneurial community
and the business support
community – covering business
development, marketing and so
on. These communities can then
mutually support one another and
work together.”
Government boost
Innovation ecosystems such as
this have formed the bedrock of
activity in places such as Boston
and Silicon Valley for decades,
Wasden adds. While they tend to
thrive without government support
once they reach a critical mass,
they rely on such help to get going.
Martijn Peeters, director of
transaction services strategy at
PwC Russia, says similar hubs
of technological development
are starting to spring up in CEE.
He cites Dubna in Russia, where
the new International Innovation
Centre of Nanotechnology
is being established by the
Kurchatov Institute, the Joint
Institute of Nuclear Research and
the International Association of
Academies of Science. The
new hub in Dubna is part of a
Russian government strategy
to turn the country into a world
leader in nanotechnology (see
article on p.16).
Government assistance is
particularly crucial for stimulating
innovation in CEE countries
because they do not have the
levels of access to private capital
enjoyed by innovators in the US,
Wasden says. Russia is not the
only country in the region taking
such steps.
“In Poland, there is the Polish
Academy of Science, which
 technology & IT

Innovation trends
The number of US patents registered by companies in particular countries is used by academics, including Dr Per Högselius
at Stockholm’s Royal Institute of Technology, as a barometer of innovation activity. Here is a snapshot of how CEE countries
compare according to this metric:

Pre 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 All
1995 years
Russia 41 99 118 112 194 185 185 239 203 203 173 154 176 193 181 2,456
Hungary 1,696 51 43 25 52 39 38 61 48 72 52 48 49 55 72 2,401
Poland 329 8 16 11 19 20 13 16 13 19 19 25 31 39 68 646
Bulgaria 347 1 1 5 4 3 1 5 3 11 4 6 4 7 18 420
Czech Republic 1 1 5 14 17 25 51 30 31 44 32 28 37 41 56 413
Serbia-Montenegro Yu 267 6 6 6 4 3 4 4 4 2 1 4 2 0 0 313
Turkey 39 2 3 5 2 4 6 14 18 32 19 10 25 24 35 238
Estonia 1 2 1 0 0 1 4 2 6 3 2 5 2 10 3 42
Kazakhstan 1 0 0 1 1 1 4 3 2 1 2 2 1 3 1 23
Latvia 0 0 0 0 1 3 1 1 0 4 2 2 2 3 1 20

Source: US Patents and Trademark Office

Armenia 0 1 0 0 0 1 0 1 1 2 1 1 2 1 1 12
Uzbekistan 1 1 1 0 1 1 2 2 1 0 1 0 1 0 0 12
Azerbaijan 0 0 2 0 0 1 1 0 0 1 1 0 1 2 2 11
Serbia 0 0 0 0 0 0 0 0 0 0 0 0 0 7 4 11
Moldova 0 0 0 0 0 3 0 0 1 1 4 1 0 0 0 10
Kyrgyzstan 0 0 1 0 0 0 1 1 0 0 0 0 0 0 1 4
Bosnia/Herzegovina 0 0 0 0 0 0 0 1 1 0 0 0 0 0 1 3
Macedonia 0 0 0 0 0 0 0 0 0 1 0 0 0 0 1 2

provides grant funding and
support for young inventors,”
Wasden says. This initiative is
designed to reverse the brain
drain. “You don’t have to be
Polish to benefit; you just have to
be linked to a Polish innovation
activity. The aim is to bring
talent into the country to create
domestic employment and
commercial opportunities.”
Help is available at EU level
too. “In the last couple of years,
since Hungary has been part of
the EU, lots of new funds have
become available. It changes
the whole picture,” says
Graphisoft’s Pfemeter.
The EU has earmarked E25bn
for supporting research and
innovation in new member states
between 2007 and 2013. On
top of this, the EU is devoting
E750m to funding research and more reluctant to engage high
development (R&D) cooperation amounts of R&D.”
between CEE firms and their While government funding
counterparts across the rest of is welcome, Wasden sounds a
Europe. “This important planning word of warning: “You often have
of investment is essential to build reviewers of government grants
and strengthen the research who have no commercial sense.
and innovation capacity of All they focus on is the scientific
central and eastern Europe,” elements. So you get people who
says a European Commission receive grant money because
spokeswoman. “The big they are brilliant scientists, but
challenge is now to implement there is no commercial avenue or
this ambitious planning within the channel.” It is important, he adds,
context of the global economic that those who are responsible for
crisis, as governments are handing out government grants
have a commercial head on
their shoulders.
“Many people are migrating to What more can governments
more developed countries.The do to stimulate and
region has the potential but we commercialise innovative
technologies? Pfemeter reckons
must work hard to keep it” investing in internet connectivity
akos pfemeter, director, graphisoft would help: “The world is

PricewaterhouseCoopers 13
 Best in class
What types of technology and IT
innovation are specific countries
particularly proficient at?
Hungary performs strongly in
innovation. Hungarians have won
10 Nobel prizes – per capita, that is
high. Moreover, the country boasts
the highest number of US-registered
patents in CEE, apart from Russia.
There are signs that the
next generation of Hungarian
technologists will continue to push
back the boundaries. For example,
a Hungarian student recently won
an international award for creating a
3D interface that enables computer
users to control on-screen images
using head movements.
Poland, meanwhile, boasts
particularly impressive healthcare
innovation and is also strong on small-
scale aviation.
In Russia, IT is one of the few
areas outside the oil and gas sector
in which domestic companies are
building strong brand recognition and
growing market share abroad. “Anti-
virus software provider Kaspersky
Lab is a good example,” says Alexey
Dang, a manager in PwC Russia’s
transaction services strategy team.
science photolibrary
14
“This company now sells more
products outside Russia than inside
the country.”
Document conversion, data capture
and linguistic software outfit ABBYY
is another Russian IT firm enjoying
global success. Its products are sold
in 130 countries and used by more
than 30 million people. “Russian
software exports are now worth
more than $1bn annually,” says Slavo
Radoševic, professor of industry
and innovation studies at University
College London’s School of Slavonic
and East European Studies. “This
is focused on the high-value-added
end of the software sector. This is a
very healthy signal.” Software and IT
services development is also relatively
strong in Romania and the Czech
Republic. Because these countries are
smaller than Russia, the importance
of looking overseas for customers is
even more important.
Elsewhere, Estonia has shone in
telecoms and IT innovation, though
this has seen high levels of exports.
“Local firms are not strong enough to
scale up sufficiently. So activities are
focused on electronic assembly, for
example,” says Radoševic.
Future thinking: Russia
has ambitions to become
a nanotech hub
shrinking because of the internet.
It brings the rest of the world into
the CEE region, which means that
there is no longer a strong reason
for people to physically leave
the vicinity. So improving online
information access will improve
the competitive advantage of
the region.”
There is also a need to foster
a culture of entrepreneurialism
across the region. Indeed, recent
polls suggest that the majority
of young Russians either want
to work for the government or
a state-owned enterprise, says
Thomas Nastas, president and
founder of Innovative Ventures, a
Michigan and Moscow-based firm
that designs and builds venture
capital funds.
Better environment
According to the EIU report
mentioned earlier, most
innovation activity across CEE
is spearheaded by foreign
rather than local firms. “Such
dependence leaves the region’s
economies vulnerable, and to
overcome this governments,
universities and local businesses
will have to work together to
improve the environment for
innovation,” it concludes.
Yet Pfemeter is adamant that
homegrown CEE companies are
increasingly holding their own
in innovation. “Foreign money
and companies come in, but
companies such as Graphisoft
are increasingly reaching out.”
What more can technology
companies in the region do
to attract investment? Slavo
Radoševic, professor of industry
and innovation studies at
University College London’s
School of Slavonic and East
European Studies, has the
following advice: make the most
of the skilled local workforce;
 technology & IT

CEE innovation hotspots

Dubna, Russia: Site of the new International
Innovation Centre of Nanotechnology, announced
Poland: In 2005, the Polish government earlier this year by the Kurchatov Institute, the
established the Council for Science, a new Joint Institute of Nuclear Research and the
body designed to finance science and International Association of Academies of Science.
technology-related R&D. Poland has a strong The Russian government has launched a strategy
track record in small-scale aviation innovation, to position the country as a world leader in
with around 55 aeroplane, glider and helicopter nanotech (see article on p.16).
firms employing about 16,000 people.

Budapest: The Hungarian capital is home to

cutting-edge technology companies such as
Graphisoft, a leading architectural software
firms and Nav N Go, a top satellite navigation
firm. Hungarians have registered more US
patents than residents of any other CEE
country apart from Russia (see table on p.13).
Moscow: Headquarters for a growing number of
world-leading software firms including linguistics
specialist ABBYY and anti-virus developer
Kaspersky Lab. In 2008, Russian IT-related
exports reached the $1bn mark for the first
time: a promising sign for the future, says Slavo
Radoševic, professor of industry and innovation
Slovenia: Ranked by the Economist studies at University College London’s School of
Intelligence Unit as the leading CEE country Slavonic and East European Studies.
by innovation performance because of its
strong links between academic research
activity and commercial enterprise.

build a robust list of western
clients and partners; and focus
on specialised products and
services rather than competing
head-on with incumbent
technology giants in the
developed world. Making greater
use of patents would also help
to bolster CEE technology firms’
investment case, he adds.
If companies in the region
focus on these goals, technology
investors are sure to become
more active in the region,
says Nastas. “Consumers and
businesses in CEE countries
“Consumers and businesses in
CEE countries are technically savvy
and open to innovation so their
uptake of technology is strong”
thomas nastas, president, innovative ventures
are technically savvy and open
to innovation, so their uptake
of technology is strong. As CEE
economies continue to mature,
we will see a broadening of
technology opportunities.”
The EIU’s Lewis expects the
recent increase in government
support for innovation across
CEE to bear fruit in the near
future, and predicts a rise in
patent levels. However, that won’t
happen unless start-ups and
investors play their part too.
How important is technology
and IT innovation to CEE
countries’ broader socioeconomic
future? Lewis says: “There has
been a consensus in the past
that transition economies should
focus on copying the West. This
is not the case. Innovation is vital
for the GDP growth of transition
economies as well.” n

PricewaterhouseCoopers 15
16

Small is beautiful
Russia is a relative newcomer to
the nanotechnology sector but
given enough investment and
regulatory freedom, it is well
placed to realise its ambition of
becoming a global leader
words: Elliot Wilson
PricewaterhouseCoopers
N
anotechnology (or
nanotech) is the smallest
next big thing. Although
theoretically this branch of
science has been around for 50
years – it was officially born on 29
December 1959, when US quantum
physicist Richard Feynman made
a groundbreaking speech at the
California Institute of Technology
(Caltech) – it only truly sprang to life
after the turn of the millennium.
Nanotech is science at a
microscopic level, on which the
universe itself can be broken down
into quantum packets, allowing
scientists to deconstruct and
analyse the make-up of everything
from single molecules to entire
planets. A nanometre is measured
as a billionth of one metre – or the
distance that a man’s beard hair
grows in the time it takes to lift a
razor to his face.
Each month billions of dollars
are pumped into nanotech
research at private institutes and
leading corporates such as French
defence group Thales, German
transport-to-aerospace giant
Daimler and US-based electronics
company Seagate. Each is seeking
ways to make smaller things that
extend our lives and make our
working careers more effective
and more efficient. In recent years
Technology & IT
Chinese, Indian and Singaporean
institutes and corporates have also
gained prominence.
And in 2007 Russia joined the
fray, in the form of the Russian
Corporation of Nanotechnologies
(Rusnano). With an initial budget
of $5bn, Moscow-based Rusnano
aims to act as a “venture investor in
nanotechnology-related projects”
– essentially, injecting capital into
start-up companies in exchange
for an equity interest. The company
is 100% state-owned. One major
stakeholder, the Moscow-based
Kurchatov Institute, has been
Russia’s leading atomic research
centre since the USSR kicked off its
nuclear programme in 1943.
Rusnano’s aims are lofty. Its
chairman, Anatoly Chubais (see
box on p.19), has reportedly said
Russia’s nanotech industry will
account for RUB900bn ($29bn)
in annual sales by 2015. While
a bold claim, the global market
for the application of nanotech
in manufactured goods alone is
tipped to grow at a compound rate
of 33% over the next six years,
reaching $3.1trn by 2015, according
to technology advisory firm Lux
Research. The overall market is
photolibrary
expected to hit $200bn in global
sales by around 2015, from about
$30bn in 2008, according to Global
17
Industry Analysts. Rusnano has
already started dipping into its pot of
cash, to date investing RUB32.4bn
in 14 projects. It always acts as a
minority co-investor, taking a less
than 50% equity stake, and provides
loans at favourable rates.
Latest investments include a
RUB3.7bn equity contribution
towards a new company
specialising in the production
of solar modules using thin-film
technology. The company, due to
be based in Novocheboksarsk, is a
collaboration between Rusnano and
Russia’s Renova Group.
Another Russia-based joint
venture, this time between
Rusnano and Danaflex, involves the
production of high-barrier polymer
film and flexible packaging materials
for the packaging of food and other
household materials. High-barrier
flexible film allows food to be heated
in microwaves without the need to
remove the packaging first. Rusnano
has put RUB1.2m into the project.
Further afield will
Rusnano is also investing overseas.
In April 2009, it announced that
it would put RUB10.9bn into the
European X-Ray Free Electron Laser
Project at Hamburg’s XFEL research
facility. Set to open in October kilometre-long laser research facility
2012, XFEL’s facility will include being built at XFEL is based on
a chamber capable of emitting breakthroughs made in the 1980s at
30,000 X-ray flashes each second. It the Novosibirsk Institute of Nuclear
will help scientists map the ultra- Physics in central Siberia. Indeed,
fine molecular make-up of many many advances in the nascent
diseases, and chart the composition nanotech field in the 1970s and
of the nanoworld. The medical world 1980s were made in Soviet research
is one that hopes to benefit from this labs, where scientists manipulated
research, which could lead to cures matter on an atomic scale.
for many ailments.
Rusnano hopes the XFEL project Track record
will be one of many overseas In the 1980s, scientists working
investments. Chubais recently met in the industrial city of Gorkiy
with leading investment banks developed a form of technology
in a bid to attract investors from known as ‘quantum dots’: tiny
outside Russia. The one condition motes of semiconducting material
placed on applications for that work on a microscopic scale
investment from overseas projects and are now used on electronic
is that part of the nanotech display screens. In 1980, the USSR
production be based in Russia. was 15 years ahead of the rest of
Rusnano’s German investment the world in nanotech research;
has a historic resonance. The 3.4 now, the US, China and some
European countries have overtaken
it. But if Moscow can to lure back
“The aim is not just to create a its foremost scientific minds,
nano-industry but to perceive it there is reason to believe Russia
can redeem its position on the
as a locomotive for creating an burgeoning nanotech scene.
innovation economy in the For that to happen, Rusnano and
country as a whole” others need more investment and
lighter state regulation. That means
anatoly chubais, easing capital controls, cutting
director general, rusnano taxes and relaxing customs laws.

A short history of nanotech

1867 1959 1965 1980s and 90s 1999
The potential of The first proper mention Gordon Moore, co-founder of Key decades for The Russian Academy
nanotechnology is of nanotechnology Intel, posited that the number of nanotechnology in of Sciences (RAS)
first mooted by Scottish (still minus the actual transistors in a given space could which the building begins publishing the
physicist James Clerk name) is made in a 29 double every year, which he later blocks for today’s respected industry
Maxwell, who imagined a December speech at updated to approximately every breakthroughs are magazine, Journal of
tiny ‘being’ California’s two years, a theory that became laid down. Major Nano and Microsystem
that is Caltech by known as Moore’s Law. This law developments include Technique. The
able to American creates the entire underpinning the invention of the publication quickly gains
control physicist of nanotechnology, which in its scanning tunneling a wide audience both
individual Richard basic form is predicated on the microscope and the at home and in key
molecules. Feynman. ability to get very small things to discovery of fullerenes institutions and colleges
do what you want them to. and carbon nanotubes. in the US and Europe.

18
 Technology & IT

can compete in the global market.”

Tiny helpers: MIT’s robotic lab hopes to use
robot ‘gnats’ to perform internal checks and
repair inaccessible machinery
The intellectual property rights of
Russian nanotech start-up firms also
need to be protected.
peter menzel, christian darkin/science photo library, getty images
Russia has long been seen as a
natural resources supermarket that
powers an economy dependent on
heavy industry. For Rusnano and
other nanotech bodies to succeed,
that must change. “If we were able
to create the basis for a market
economy then the next aim is to take
it to the next level,” Chubais told the
FT. “Now we have to go [back] to
college. Russian business should
learn not just how to make good
steel or extract oil but also produce
innovative goods. This is a very
complicated task.”
Anatoly Chubais: the right man
At the head of Rusnano sits
Anatoly Borisovich Chubais, a
businessman, political figure
and reformer. It is hard to
imagine anyone better suited
to running Rusnano than the
54-year-old Chubais.
His background as an
engineer and financial thinker
introduced him to a group of
pioneering economists in the early 1980s. Determined
to bring free market-based reform to the Soviet Union,
Chubais was the key figure involved in the privatisation of

Chubais has said nanotech is
a vital cog in the wider Russian
economy. It is a standalone revenue
and tax generator while driving a
variety of other economic sectors,
including utilities, medical products,
clothing and military applications.
“The aim is not just to create a
nano-industry, but to perceive it as a
locomotive for creating an innovation
economy in the country as a whole,”
Chubais said in an interview with
the Financial Times. “We have a
market economy, but our market is
fairly primitive. It produces oil, gas
and foodstuffs but very few modern
high-tech goods. At the moment,
we mostly do not have products that
Tapping potential
Hungary, widely seen as a CEE
leader in the nanotech space,
might offer one model solution. It
has more than 50 research groups
and institutes, each focused on
developing new, nano-scaled
technology that can be applied
across all manner of industries.
Such investments will be repaid
because nanotech really is the
next big thing. True, the sector is
controversial, with many critics
worrying about the potential damage
to the environment and human
health caused by meddling with
nature at such a quantum level. In
Russian state interests from 1991, on the watch of former
president Boris Yeltsin.
He remained an influential figure during Vladimir Putin’s
presidency, and his high profile in the Russian corporate
and political world under four Soviet and Russian
presidents has earned him respect in many quarters.
During his 10 years as head of UES, Russia’s state-
owned electricity company, he delivered unprecedented
reform of the nation’s utilities industry. The former
vertically integrated system of power assets today
operates as two segments: competitive power generation
and monopoly-based distribution. The industry has also
successfully attracted big and small foreign investors.
All this makes Chubais a logical choice to head state-
owned Rusnano, which needs to throw off the shackles
of government regulation and cut investment deals in
Russia and across the world.

2007 2008 2009

Moscow launches a new institute for development,
the Russian Corporation of Nanotechnologies
(Rusnano). Based in Moscow, and with an initial
budget of $5bn, Rusnano’s stated aim is to act
as a “venture investor in nanotechnology-related
projects”. IBM announces it is close to creating
magnetic anisotropy in individual atoms and
molecules. This would mean the creation of a
fundamental new way to store and stream digital
information on a quantum scale. In future, it will
probably be possible to store millions of videos or
files on a device roughly the size of an iPod.
Andre Geim and Kostya Novoselov,
researchers at the University of
Manchester, produce a ground-
breaking new material, graphane,
derived from graphene, which
opens up new possibilities in the
development of electronic devices.
As well as being both an insulator
and a semiconductor, graphane
might also find use as a hydrogen-
storage medium and could be used
to create transistors.
Rusnano announces it will invest RUB31.6bn in
projects in 2009, with 90% invested in industry,
infrastructure and educational projects, and the rest
to be invested in the XFEL project. Rusnano says
it will invest 250m in the European X-Ray Free-
Electron Laser Project at Hamburg’s XFEL research
facility. Separately, Rusnano announces it will invest
$36m in a packaging materials joint venture with
a Tatarstan-based firm, Danaflex. In exchange,
Rusnano will receive a 49% share, which will
manufacture high-barrier plastic film used in
grocery, pharmaceutical and cosmetics packaging.

PricewaterhouseCoopers 19
Growth
Growth
can be
can be
achieved
achieved
in any
in any
climate.*
climate.*
No matter what the markets are doing, Advisory Managing Partner – CEE
or how buoyant the economy may or Mark Okes-Voysey +7 495 232 5713
No
maymatter what
not be, the markets
it’s never areand
all doom doing, Advisory Managing Partner – CEE
or Consulting Leader –+7
CEE
gloom. There are always ways for or
how buoyant the economy may Mark Okes-Voysey 495 232 5713
may not be, to
it’sgrow.
never all doom and Bob Gruman +7 495 232 5725
businesses Consulting Leader – CEE
gloom. There are always ways for Transactions Leader – CEE
All you needtoisgrow.
the right advice from Bob Gruman +7 495 232 5725
businesses Mike Wilder +48 22 523 44 13
the right people at the right time. Transactions Leader – CEE
All you need is the right advice from Mike Wilder +48 22 523 44 13
the right people at the right time.

*connectedthinking
*connectedthinking
© 2009 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

© 2009 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.
 Technology & IT

recent years, for example, European

countries banned the addition of Nanotech in practice
silver nanoparticles to clothing, after
finding that the metal leaks into Clothing: Military
waste water during washing, where Nanoparticles applications:
it destroys bacteria essential to embedded with In future, nanobots
human health and water treatment. silver particles can be used
Still, the potential is vast. Nano- added to clothes to dismantle
wiring in semiconductors massively prevent textiles landmines,
increases the power of every from getting while smaller
electronic component. For the same sweaty. The silver working parts
reason, doctors expect nanotech to particles prevent the build-up of bacteria mean smaller working bombs, allowing
provide the next great leap forward that leads to body odour. On the negative payloads to be carried on smaller aircraft.
in the medical and pharmaceutical side, the silver often washes out, harming Carbon nanotubes in protective clothing,
space. Nanotech will allow doctors waste water and ‘good’ bacteria that we meanwhile, will cause bullets to bounce
to identify cancerous tumours, for need in our bodies and in nature. Prognosis: off. Prognosis: another profitable set of
example, before using nano-scale work in progress. applications, although smaller bombs will
therapy to destroy them, as well as also be more easily hidden by terrorists.
miniaturised tools driven by nano-
powered batteries. Weatherproofs: Medical
The potential at this infinitesimal Nanoparticles procedures:
scale is virtually limitless. Nanotech added to Nanobots and
will eventually allow scientists to weatherproof nanoinstruments
visually deconstruct entire planets, clothing prevent can be used to
allowing us to view them from any water or wind operate on a
the insides – and to see if any getting in. The microscopic scale
extrasolar planets are capable of tight tubing of the on everything from
sustaining life. particles can also shrink clothing to a precise kidney stones to ear infections. Nanotubes
Researchers at Brown University fit and, when allied with bacteria-proof can be inserted into joints to rebuild
in the US believe they are close to particles, means that clothing can be worn cartilage and spur regrowth. Prognosis:
being able to repair damaged joint for months without needing to be washed. nanotech will allow us in time to ‘visualise’
cartilage by inserting microscopic The downside is the expense. Prognosis: the entire body, broken down into healthy
carbon nanotubes, which in turn promising but, like all new technology, needs and damaged molecules. Could bring in
cause stronger cartilage cells to fall in price before being widely accepted. trillions of dollars in revenue.
eye of science, volker steger, science photo library/alamy

to be generated. On the military

front, University of Sydney Green Meteorology:
researchers have created a system technology: Astronomers
of interlocking carbon nanotubes Virtually unlimited will be able to
that create an almost indestructible potential. use complex
protective jacket. Ultracapacitors visual tools to
Few of the most advanced in batteries will give us an idea
products in the nanotech space eventually lead to of where other
have emerged from CEE but with much more durable habitable planets
enough time and money – and a batteries powering any manner of electric lie. Geologists
lighter regulatory touch – there is no vehicle. These ultracapacitors are able to and physicists will use the same process
reason why Russia or the withhold, release and absorb energy at a to understand the make-up and structure
likes of Hungary, the Czech far more prodigious pace and in greater of our own planet. Prognosis: less practical
Republic, Poland and Slovenia, quantities than existing batteries. Prognosis: than other applications, but could help us
cannot become global leaders huge potential; few obvious drawbacks. understand ourselves and the universe.
in nanotechnology. n

PricewaterhouseCoopers 21
Net
gains
CEE governments are stepping up efforts to
offer e-services, but some are finding that
demand remains weak. Consulting citizens
first will guarantee better take-up

22

S
imultaneous political,
economic and social
reform has, without doubt,
been the biggest good news
story across CEE over the past
two decades. Less celebrated is
the ability of many government
services to keep up with this
reform, but this situation cannot
be sustained for much longer. As
the region’s market economies
mature, government departments
will start to feel pressure from
several sides: citizens will demand
better public goods and services;
the burgeoning private sector will
seek an appropriate investment
climate, regulatory regime and
a level playing field; and the
democratically elected parliaments
will want the delivery of effective
policies and programmes.
Finding a solution
Many officials and observers
tout ‘electronic government’ as a
way of meeting these emerging
demands. For e-government
enthusiasts, the internet and
related technologies offer a fast
track to updating and improving
moribund public services and,
in the process, altering the
relationship between governments
and their various stakeholders.
Exactly how do they expect
the relationship to change? Neel
Ratan, an executive director with
PwC India and an e-government
veteran, sums it up: “In the past,
most government services were
designed with the government at
the centre. Now the question is,
how easy is it for the citizen to get
the service done?”
getty images
That is a question that lies at the
heart of the work on e-government
that Ratan and his team have
technology & IT
carried out for the Indian
administration. It is a project that
could prove to be a model for
many CEE governments.
The award-winning e-Sampark
project in Chandigarh, northern
India, employs a one-stop-
shop approach to providing
government services for local
residents. The e-Sampark centres,
available at 11 locations within the
city of Chandigarh and 13 more
in outlying areas, allow residents
to access multiple services at “In the past, most
a single point – for example, to government services
pay taxes and electricity bills,
get birth and death certificates, were designed with
and apply for passports. Staff the government at
input information on computers the centre. Now the
for citizens who need help,
overcoming problems of computer question is how
illiteracy. The city, which is well easy is it for the
known for its modern approach citizen to get the
to urban planning, says the main
point of e-Sampark is to avoid service done?”
the need for visits to multiple neel ratan,
locations, and to improve access executive director, pwc
for citizens who would normally
visit the city centre to carry out
basic tasks such as paying taxes.
In addition to public services,
e-Sampark also allows visitors
to pay private sector bills, and to
access other services online.
The e-Sampark initiative has
been a resounding success.
Since launching in September
2004, the project has been
singled out for praise by Indian
Prime Minister Dr Manmohan
Singh, and has also received a
Golden Peacock Award from the
Indian Institute of Directors.
e-Sampark’s knack of allowing
local citizens’ needs to drive the
way e-government services are
developed is something CEE
could do with emulating if it is to
23
e-government readiness: How CEE shapes up
Country Readiness score
Estonia 0.7600
Czech Rep 0.6696
Slovenia 0.6681
Lithuania 0.6617
Hungary 0.6485
Poland 0.6117
Latvia 0.5944
Slovakia 0.5889
Bulgaria 0.5719
Romania 0.5383
Source: United Nations 2008 e-Government Survey
be equally successful in this area.
At the moment, provision across
the region is patchy.
Some nations are bounding
ahead. Estonia and Slovenia have
been investing in e-services for
some time, seeing technology
as a source of national pride and
a badge of modernity. After a
slower start, the likes of the Czech
Republic, Hungary and Latvia are
progressing strongly too, driven
by outside influences, as well as
internal political pressures.
EU influence
EU accession has played a major
role in persuading countries to
pursue e-government initiatives,
says Ljupco Todorovski, a
professor specialising in
e-government at Slovenia’s
University of Ljubljana.
“Many governments adopted
e-government during EU
accession, as part of reforms to
make them seem more modern in
the eyes of Brussels.”
The availability of EU structural
funds for electronic development
provides an ongoing incentive as
well, according to Jiri Halouzka,
advisory partner in the Czech
24
World rank Key website
13 www.riik.ee
25 http://portal.gov.cz
26 http://e-uprava.gov.si/e-uprava
28 www.evaldzia.lt
30 www.magyarorszag.hu
33 www.poland.gov.pl/
36 www.mk.gov.lv
38 www.portal.gov.sk
43 www.government.bg
51 www.gov.ro
Republic and CEE public sector
leader at PwC. “There is a
special operational programme
where you can finance many
e-government programmes using
EU funds. That’s why in the Czech
Republic it has moved forward
substantially,” he says.
There are other, less direct
drivers. The influence of
organisations such as the EU and
the United Nations (UN) – both
of which have e-government
benchmarking exercises – has
created a virtuous circle where
governments continually add
more services as they seek to
maintain their standing among
their peers.
Across CEE, e-government
services include registering cars,
births and marriages; issuing
licences, building permits and
passports; collecting taxes, VAT
and customs fees; and providing
information about medical tests
and state procurement. Recently,
countries such as Estonia have
begun to use technology to
deliver services and to involve
citizens more directly in the
running of government.
The development of
e-government is particular to
each country, depending on the
nature of government structures,
the expectations of citizens
and the internal motivations
of administrations in charge.
Estonia’s development has
been helped by a proximity
to e-government pioneers
Finland and Sweden, and the
expectations of its people, who
were exposed to IT even during
Soviet times. That Estonia has
fewer than 1.4 million people
means reforms are less complex
than elsewhere.
Arvo Ott, executive director of
the e-Governance Academy in
Tallinn, says political dynamism
has also been important to
in numbers
Estonia’s quick progress. “There
Regional was motivation among our top
average of leaders to push forward the key
e-government projects. We launched electronic
readiness ID cards in 2002, and it gives us
good grounds for interoperability.
0.6490 The same tools can be used on
government sites and on private
EUROPE sector sites, for internet banking
0.4936
and so on.”
The Americas High scoring
While Estonia ranks 13th overall
0.4470 in the UN’s 2008 e-Government
Survey, its fellow Baltic countries,
asia Lithuania and Latvia, are in 28th
0.4338 and 36th places respectively (see
table, above). Hungary, Poland
oceania and Slovakia score respectably in
the UN survey but outside the EU,
0.2739 CEE countries have moved slower
on e-government.
africa
Russia for example, produced
Source: UN, 2008
an “E-Russia” plan in 2002, but
the scheme stalled. President
Dmitry Medvedev recently
announced an initiative to
revitalise the project. In February,
he admitted that most internal
masterfile
government documents still
circulated in paper form, and that
little had improved for citizens.

Miroslav Lyantsevich, a
Moscow-based independent
analyst, says much of this malaise
in Russia is down to a problem of
definition. The task is perceived
mostly as a technical one, and
little attention has been paid to
how this new software will change
the way citizens and government
interact with each other. These
changes would require significant
legislative amendments. “The
citizen, for example, is still not
legally able to use an electronic
signature when accessing
government-issued documents
online,” says Lyantsevich. “There
is no body within or outside the
State Duma [Russia’s parliament]
responsible for making the
appropriate legislative proposals.”
Not only that, there is an absence
of consistent political will
throughout Russia’s three-tier
governance structure to make
e-government a reality.
Haiyan Qian, director of the
Division for Public Administration
and Development Management
at the UN Department of
Economic and Social Affairs,
who is also responsible for the
UN e-Government Survey, says
political will is the top factor
in determining how quickly
PricewaterhouseCoopers
countries adopt e-government.
The UN’s e-Government report
says governments move through
five stages of evolution in their
electronic development. The
first is a web page with basic
information. The second is an
enhanced site with links and
downloadable documents. The
third has some interactivity, with
access to forms for tax payments.
The fourth allows citizens to
pay taxes. The final stage has
an integrated ‘back office’
government infrastructure, with
electronic connections between
departments, to third-party
stakeholders and citizens through
a range of services.
Qian says the majority of
governments are stuck at
stages two or three, believing
that e-government is merely a
matter of putting services into
an electronic form. This is often
because governments fail to put
their citizens’ needs at the heart
of their e-government strategies.
Qian says: “A lot of countries have
made the mistake of imagining
what citizens want and delivering
that without asking them first.
At one point, one of the eastern
European countries, for example,
found that only 1% of its citizens
“The citizen, for example, is
still not legally able to use an
electronic signature
when accessing
government-issued
documents online”
miroslav lyantsevich,
analyst, russia
technology & it
E-government best practice
Focus on the customer: Effective services are
based on in-depth analysis of customer data.
Explore alternative delivery: Real world service
centres, kiosks, and mobile delivery, rather than a PC-
based service, ensure access to the greatest number.
Get high-level buy-in: Evidence shows that those
that have moved furthest in e-government are those
that gained political commitment at an early stage.
Learn from others: Leaders in e-government tend
to take ideas from elsewhere, skipping needless
trials and errors of their own.
Improve continuously: E-government is a process,
not a destination. Leading countries are never
satisfied and are always thinking about ways to
improve their services.
Reform, don’t repurpose: The best administrations
are moving beyond simply putting offline services
on the internet. Instead, they are thinking about
e-government as an end-to-end process to be more
efficient and customer-focused.
was using their government
service online.”
But as Ratan’s team
demonstrated with its work on
the e-Sampark project in northern
India, it is possible to overcome
this obstacle and when that
happens, citizens are motivated
to actually use e-government
services. In April 2009, e-Sampark
collected about 830m INR
(E12.3m) per month in revenue,
up from 300m INR the year
before. Chandigarh now plans
to add more e-Sampark centres
soon to expand access further.
Such a ‘customer-centric’
approach will require a change in
mindset among many government
departments, especially among
those in the former Communist
Bloc. “The focus on the customer
is something new in this part
of the world,” says PwC’s
Halouzka. “For many years, if you
needed something from a public
institution, you were treated with
caution. Now that is changing.” n
25
 In from the
cold
Finnish energy company Fortum
has expanded into Russia and
is stressing the importance of
transparency and compliance

26

A
little over a year ago,
Fortum, Finland’s largest
energy utility, took a giant
leap forward in its bid to expand
beyond the company’s Baltic
Rim home turf when it acquired
a majority stake in TGC-10
(Territorial Generating Company
number 10), which was up for
sale as part of the privatisation of
Russia’s electricity sector.
The deal was a major coup
for Fortum: buying one of the
14 Russian TGCs gave Fortum
a foothold in a huge and fast-
expanding market. TGC-10 had
the added draw of being located
in the heavily industrial area of the
southern Urals Federal District
and part of western Siberia.
However, the deal also brings
an unfamiliar degree of risk for
Fortum, and not just a financial
risk – though that is large
enough, with the E2.5bn price
tag for the acquisition of 93.4%
of the company. The deal also
represents a huge cultural leap for
the Finnish utility, bringing it 2,200
kilometres south of its Helsinki
home base and into a vastly
different business culture.
In February, when PwC was
brought in by Fortum to conduct
a full gap analysis of TGC-10’s
internal audit, risk management
and control systems, the point
person picked was Michelle
Moore, partner in PwC’s Moscow
Performance Improvement
practice (part of Governance, Risk
and Compliance, or GRC).
In recent years, Moore and
her colleagues have worked
with some of the largest energy
companies, including TNK-BP
and Tatneft, the first Russian
energy company to list on the
New York Stock Exchange.
getty images
For its part, Fortum has
operated outside its home
country for years, including in
PricewaterhouseCoopers
capturing deal value
the former Soviet bloc through
its interests in Poland. But
the risks of operating a newly
privatised utility in southern
Russia represented a quantum
leap. “A company that has never
been public – especially one
that is in an outlying Russian
region – is just not used to being
as transparent about its own
risks and controls, and their
impact on the business, as a
listed western company,” Moore
says. While TGC-10 employees
may have had some experience
of compliance regimes, they
simply had never considered a
global context and the potential
exposure that a publicly quoted
western company’s brand has.
On the ground
For the risk assessment project,
Fortum’s man on the ground
is Lars-Hakan Ellenius, vice-
president of risk at TGC-10.
The initial objective, he says,
was to try to implement as
much as possible the basic
elements of Fortum’s existing
risk management system in
TGC-10. However, the company
is fully aware of the difficulties
involved, as illustrated by the
following passage from the risk
management section of Fortum’s
2008 annual report: “Inadequacies
in the legal systems and law
enforcement mechanisms in
Russia… exposes Fortum to risk
“We recommend
defining the
business process
owner and
articulating new
KPIs”
michelle moore,
Partner, PwC
27
Risk and reward.
Risk and reward.
Find the right balance.
Find the right balance.

Putting risk at the centre of your business

is important now more than ever.
Putting risk at the centre of your business
is
At important now more than ever.
PricewaterhouseCoopers we work
with companies helping them to bridge
At
riskPricewaterhouseCoopers we work
and business strategy. Putting risk
with companies helping them to bridge
at the centre of their business and still
risk and business
achieving success.strategy. Putting risk
To find more
at
visit pwc.com/financialservicesand still
the centre of their business
achieving success. To find more
visit pwc.com/financialservices

© 2009 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

© 2009 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

of loss as a result of criminal or
abusive practices by competitors,
suppliers, or contracting parties.
Fortum’s ability to operate in
Russia may also be adversely
affected by difficulties in protecting
and enforcing its rights in disputes
with its contractual partners or
other parties, and also by future
changes to local laws
and regulations.”
Slush funds
This is more than boilerplate risk
copy. There have been plenty
of examples in recent years of
western companies that have done
huge damage – both financially and
to their reputations – because they
have assumed a relativist approach
to governance and operating
practices in emerging markets.
Perhaps the most high-profile
example recently involving
Russia was Siemens, the German
industrial conglomerate that has
had to pay massive fines and
has seen some of its most senior
executives face trials for running
slush funds to secure business. In
December 2008, Siemens finally
resolved all the charges under the
US Foreign Corrupt Practices Act,
by agreeing to pay $1.6bn in fines
and disgorgements of profit.
As Moore says, the risks
are very well known among
senior Russian executives.
PricewaterhouseCoopers
Extensive investment programme in russia
Fortum plans to increase generating
capacity across TGC-10’s six
locations from 3,020 MW to 5,290 MW
•Helsinki
•Moscow
Source: Fortum Annual Report 2008
But translating their concerns
down to the shop floor proved a
painstaking effort, which required
her to spend time working with
Ellenius and key managers in
Chelyabinsk on the details of
the gap analysis and how to turn
Fortum’s system into a workable
equivalent for south Russia.
As with the parent company’s
risk framework, the audit
committee is responsible for
risk oversight at the local level.
All change: TGC-10, which The main principle of the Fortum
produces electricity for the
oil and gas sector, faced system is that risks are managed
major changes to bring at source and to maintain a strict
it into line with Fortum’s
business culture segregation of duties, risk control
functions at the business and
service unit levels are responsible
for reporting risks to Corporate
Risk Management at group level.
The system advocated by PwC,
Moore explains, is twofold; a kind
of carrot-and-stick approach. “We
recommend defining the business
process owner… and articulating
new KPIs [key performance
indicators] for a particular job,” she
says. The carrot part is that the
KPI is linked to salary and bonus,
while the stick part is that job
capturing deal value
Tobolsk•
Tyumen•
Nyagan• • Kurgan
Argayash •
• Chelyabinsk
performance is assessed partly in
terms of how the business process
owner has assessed the risks and
designed controls to mitigate it.
New culture
The real test is in eliminating bad
practices that may have become
embedded, such as paying
kickbacks to suppliers. “The only
way to overcome these challenges
is to show how it is going to
be good for their jobs and their
pocketbooks, and to show how
they can do better without these
practices,” Moore says.
For TGC-10, Ellenius says the
company has initially focused on
just a handful of priority areas.
Have there been any surprises?
Ellenius treads carefully but
says that the process revealed
some “important angles in the
purchasing process” that helped it
to tighten up its control systems.
Caution about internal controls
is something Moore encounters
time and again from Russian
executives: nobody wants to end
up as the Russian Enron. That is
the main point of the exercise. n
29
Marina Jigalova-Ozkan,
head of Walt Disney in
Russia, has faced many
challenges during her
climb up the career
ladder – but none has
been because she is a
woman, she says

30

Female intuition
Leading businesswomen in CEE say that, provided they
put their strengths to work, there is no reason why
they should be at a disadvantage compared to men
Words: Eila Rana
M
arina Jigalova-Ozkan
knows about success. A
graduate of the Moscow
State Institute for International
Relations, she took up her first
board position when she was just
25. Today, she runs the Russian
operation of US-based global
entertainment company Walt Disney.
Along the way she has served
as first deputy general director
of Prof Media Moscow (part of
Russia’s biggest media company),
worked at the European Bank for
Reconstruction and Development
and earned an MBA from Harvard.
The road to success has not
been short of challenges. Most have
been about not being afraid to take
responsibility early on in a role; not
being afraid to have a view; and not
being afraid to make mistakes – but
none have been because she is a
woman in a mostly male world. On
Portrait: Frank herfort
that front, says Jigalova-Ozkan, “I’ve
never experienced any difficulties.”
That is a common story among
many women working on the front
line of business across CEE. It
is a far cry from the almost daily
PricewaterhouseCoopers
developing talent
accounts in western Europe and
beyond of the glass ceiling that
women in the corporate world face.
In the UK, for example, Harriet
Harman, the government minister
for equality, has proposed new
legislation that will require firms
employing at least 250 staff to
publish hourly pay rates for men
and women by 2013 in a bid to
expose employers who pay female
employees less than their male
“It’s part of
colleagues. Furthermore, a recent mythology that
PwC survey of City professionals women are unable
concluded that the pipeline of female
leadership for UK business could
to cope with further
be reversed or irreparably damaged career progression.
by the current economic downturn, That’s one of the
after almost three-quarters of the
mainly female respondents said they
biggest reasons for
saw redundancy as an opportunity female turnover at
to exit corporate life. senior levels”
Companies like PwC have long
Natalia Yakovleva,
worked towards mitigating this risk
via initiatives such as its Gender partner, Pwc
Advisory Council, an international
group of 14 senior male and
female leaders from across PwC
who actively seek to improve the
representation of PwC women in
31
Fortunate one: Henryka
Bochniarz, president of
the Polish Confederation
of Private Employers –
Lewiatan

32
 developing talent

the workplace. This initiative was

recently recognised by Opportunity
Now – a UK-based employers’
group that promotes gender equality
at work – which presented PwC with
its Global Award at the Opportunity
Now Awards 2009.
Glass ceiling stories coming out
of CEE are few and far between.
Why the difference? It is partly to
do with a new era of economic
opportunity that many women, and
men, are living through across the
region. Tanya Rukavina, country
managing partner with PwC
Croatia, says the face of business
in Croatia is changing. “Younger
people are taking over leadership
roles in business,” she explains.
“They are looking for innovation,
they are looking for their place in
the European Union and they are
looking to move forward. They can’t
afford to be stuck in the old ways.”
Rukavina is typical of that new
generation of leaders. A Croatian-
born national, she moved to
“You have to start
from zero every
time, building your
own reputation and
credibility, which
is tough”
Olga Grygier,
country managing Partner,
PwC poland
Canada when she was young. After echelons of business. Most women
joining PwC Canada in 1988, she will say that the decision whether
transferred to Budapest five years or not to pursue career progression
later and worked her way back to is very much a personal one.
Croatia, making partnership in 1999. One of Rukavina’s most valued
Today, she is the only female partner clients is Lada Tedeschi Fiorio, a
among the Big Four in Croatia. shareholder and vice president of
There is also a strong desire the supervisory board at Atlantic
in CEE not to institutionalise Grupa, a Croatian-based sports
any inequality in male/female food production company. Tedeschi
representation in the higher Fiorio joined Atlantic Grupa – a part

When luck runs out

Henryka Bochniarz counts herself as
one of the fortunate ones. The former
Fulbright Scholar has enjoyed a long
and varied career during which she
founded one of the first consulting
companies in Poland, NICOM
Consulting, and served as the country’s
government minister for industry.
“I had no major trouble with my
career,” she says. “I think it was
because of my knowledge, character
and perseverance. Compared to other
women, I had a lot of luck and a chance
to work with many smart men.”
In her current role as president
Portrait: filip miller
Bochniarz reckons Poland’s working
women suffer “multi-dimensional”
discrimination: not only do they
have less access to senior executive
positions, they also earn less money
than their male colleagues (20% less,
on average) and tend to be employed in
less prestigious economic sectors. They
also struggle with juggling work and
family commitments, which can lead to
discrimination at both recruitment and
promotion stage.
Female discrimination hurts
companies too, she adds. According
to recent research, the best-performing
be observed in European companies
and the more women they employ, the
higher their return on capital is.
For this reason, it is crucial for the
government and companies in Poland
to implement measures to help women
progress in the workplace, Bochniarz
argues. Employers should allow for more
flexible working arrangements and grant
women access to jobs with promotional
potential, while the government should
provide suitable child care systems. It
should also stop introducing laws that
are more of a hindrance than a help. A
case in point? The recent introduction

of PKPP Lewiatan – the Polish Fortune 500 companies employ more of protection against redundancy after
Confederation of Private Employers women at medium and high managerial maternity leave is pushing women out of
– she seeks to help women who have positions compared to more poorly the jobs market because employers are
not been so lucky in the workplace. performing firms. A similar trend can more reluctant to take them on.

PricewaterhouseCoopers 33
 family-owned business run by her
brother Emil Tedeschi – in 1997.
Her success is not down to family
connections or her gender, she
explains. “It was very much based
on my professional skills and my
willingness and dedication to the
job and to the company itself. Some
women choose not to go into top
positions – they are tough roles,”
she says. “It doesn’t mean because
they are not at the top they are
discriminated against.”
Exploding myths
In the same way that
businesswomen in CEE are
reluctant to institutionalise a lack
of female representation at senior
levels, they generally believe
solutions to this issue are also very
personal. In fact, many say it is
time to explode a few myths about
why women do not succeed as
well as men in the workplace.
Natalia Yakovleva – a partner
with PwC Russia’s Technology,
Communications and Entertainment
team, who works closely with Walt
Disney’s Jigalova-Ozkan – has a
young daughter. Being a working
mother did not preclude her from
becoming a partner at PwC,
Yakovleva points out. “It’s part of the
mythology that women are unable to
cope with further progression in the
firm,” she says. “That’s one of the
biggest reasons for female turnover
at senior levels, I think.”
Not only has Yakovleva managed
to balance a busy work and home
life, at times she has exceeded the
performance of her colleagues.
On returning from maternity leave,
she found herself in a performance
appraisal for the seven-and-a-half
months that she had worked that
year. “My boss was shocked,” she
remembers. “He said I had achieved
the same as partners who had
34
worked for 12 months.” How does
Yakovleva do it?
She says it is down to three
things: getting buy-in to personal
flexible working needs from bosses
and colleagues; defending those
boundaries; and ensuring you deliver
on performance objectives.
“I have been quite strong-willed
in defending my boundaries and
my male colleagues really respect
my approach,” Yakovleva says. “I
do believe it’s really important when
women are planning their family
lives that they should have the
“Younger people are
taking over leadership
roles. They are looking
to move forward. They
can’t afford to be stuck
in the old ways”
tanya rukavina, country managing
partner, PwC croatia
buy-in of colleagues to make sure
that any arrangements they make –
including flexible work options – are
understood and accepted.”
What about the other myths?
Women cannot communicate;
women cannot think strategically;
women do not make good leaders.
Much of that, says Yakovleva, is
just not true. Women’s inclusive
and consensual communication
style is often more effective at
achieving buy-in compared to male
colleagues’ directness.
It is also a myth, says Yakovleva,
that women are not capable of
thinking long-term and are not good
at strategy. “I believed this myself so
I requested training to understand
clients’ strategic agendas when I
was a first/second year partner,”
she says. “I found that women are
actually thinking about longer-term,
sustainable approaches rather than
short-term immediate options.
Women need to build their own self-
confidence in this area.”
Empathy advantage
As for management styles, Tedeschi
Fiorio reckons women have more
empathy than men. “They are better
at multi-tasking, multi-thinking, they
are more open-minded and take
more things into consideration,” she
adds. “That helps gain trust and
loyalty. The worst thing a woman
can do in business is pretend to be
like a man.”
There are some things, however,
that will always be tough to tackle.
Olga Grygier, recently made PwC’s
country managing partner in Poland,
says the time when careers become
most demanding tends to coincide
with the time when women start
their families – in their early to mid-
30s. “That’s a structural problem,”
she says. That said, it is not unusual
to see women at senior levels of
 developing talent

business in Poland, she adds. in numbers Tough at the top:

The bigger problem in this part Lada Tedeschi Fiorio,
of CEE is building credibility. “In
10-15%
shareholder and
vice president of the
the UK, if you’re a partner at PwC, supervisory board at
Atlantic Grupa
a certain level of knowledge,
experience and capability is taken Average
for granted,” says Grygier. “Here, percentage of
you have to start from zero every female partners in
time, building your own reputation PwC globally
and credibility, which is tough.”
That is a legacy from the early
days following the collapse of the
Berlin Wall, when western European
20%
advisers attempted to apply their Percentage of
experience to CEE problems, with female partners in
limited success. That has left many PwC across CEE
in CEE sceptical of what external
advisers can bring to the table.
“You need to prove to the client
that you know what you’re talking
25%
about, you have the right experience Percentage of
and you can apply that knowledge female partners in
to the particular problem. It takes PwC Russia
time, and very often it takes social
interaction. That’s where women find
it tougher because you don’t go out
for a beer maybe as often as your
60%
males colleagues do.” Percentage
Whether women like Grygier of PwC Russia’s
have the time to entertain clients entry-level intake
late into the evenings or not, the that is made up
fact is that companies need a fair of women
representation of women at all levels.
Not only are women leaders more
likely to get the best out of female
employees, they can also better
exploit the potential of relationships
with female stakeholders outside
the organisation, says Yakovleva.
Not only that, “the more diverse your
organisation is, the more sustainable
it’s going to be.” Diversity along any
lines, including gender, tends to buy
an organisation a longer and more
secure future.
Portraits: Dag orsic

The good news? Women in CEE

are not looking for any special
favours. As Rukavina says: “I would
never want to be chosen for a
position because I’m female.” n

PricewaterhouseCoopers 35
 Best-laid plans: Baia Mare’s mayor has
plotted the commercial, social
and environmental future of the city
A fresh start
Outside its famous capitals, cities across CEE are
building new reputations to attract investors. Baia Mare
and Ekaterinburg are two of many leading the way
E
very city loves to style itself
as memorable for someone
or something. What is
Liverpool without the Beatles,
Sydney without the Opera House
or Kyoto without geishas?
Ekaterinburg and Baia Mare,
two hugely ambitious cities
in CEE, are seeking to put
themselves on the map in similar
ways. While Baia Mare – a
prosperous city on Romania’s
northern frontier – wants to
become a beacon of urban
regeneration, the challenge for
36
Words: Charles Orton-Jones
Russia’s Ekaterinburg is to unlock
the huge potential offered by its
wealth of natural resources.
Fortunately, both cities have
leaders who are determined to
create new reputations for their
respective homes. Their approach
and the role played by partners
such as PwC are being seen as
templates for other aspiring cities.
Baia Mare’s mayor Cristian
Anghel has held the post since
1993, when the city was still
adjusting to life after Nicolae
Ceausescu. Anghel is the architect
of Baia Mare’s long-term plan to
become that beacon of urban
regeneration and show the rest of
Romania what is possible. He is a
methodical planner, a dedicated
believer in masterplans, having
written a document in 2002 that
plotted the commercial, social and
environmental future of the city.
The 2002 document was
based on a United Nations
initiative called Agenda 21,
which was designed to reconcile
emerging nations’ desire for
explosive economic growth with
environmental concerns. Anghel
adopted the resolutions of Agenda
21 and used them as a basis for
analysing everything that was right
and wrong with Baia Mare. His
report delved into every aspect
of local life, recording the growth
of industrial waste, the chemical
composition of waste gases, and
even calibrating roadside noise.
His strengths, weaknesses,
opportunities and threats analyses
were brutally honest. Threats
included the potential collapse
 growth in cee

of the social security system, and say that we care about our
fact file: BAIA MARE unemployment in the mining and neighbourhood, communities
• Location: Maramures metallurgic industries and ancient and about the natural beauty
County, Romania public transport. Anghel warned that surrounds our city. It’s time
• Population: 137,921 that if Baia Mare didn’t follow the to admit that Baia Mare is our
• Mayor: Cristian Anghel plan, the brightest young talent city, our citadel. Why don’t we
• Founded: First mention, would depart for Cluj, which turn it into an oasis of prosperity,
1347 offered world-class education only cleanliness and safety? It is within
• Economy: Mining, 150km away. Baia Mare has many our power!”
manufacturing, agriculture, natural advantages, despite having
construction, tourism a population of only 137,921. Its The results
proximity to the Hungarian border Now the legacy of Anghel’s plan
means it is a thoroughfare for is plain to see. Wages in the city
freight. It has strong construction
and agriculture sectors, and its
historic character lends the city
tourist potential.
Anghel set Baia Mare to work,
devising radical measures,
including 12 to upgrade the city’s
infrastructure, seven to tackle
environmental problems, 14 to “We used instruments for
rehabilitate deprived areas and
21 to improve civic life. Not a
communication and public
sewer, telephone pole, road or consultation such as polls,
stream was excluded. The mayor themed contests and
exhorted his fellow citizens to
join him in achieving these goals:
public debates”
“It is time to look around us cristian anghel, mayor, baia mare

PricewaterhouseCoopers 37
Must see: Baia Mare’s history makes
it attractive to potential visitors
are 20% higher than the national
average. Tourism is growing and
three new shopping centres are
under development. The ring road
has been upgraded as part of
a national E32bn infrastructure
programme and a new motorway
will provide a fast connection to
Vaja in Hungary.
Far from resting on his laurels,
last year Anghel launched an
update of his original plan. He
says the secret to implementing
such a far-reaching schedule for
regeneration is consultation. “All
our projects are based on public
consultation campaigns. These
focus on messages that would
lead to informing, as effectively
as possible, partners and final
beneficiaries, to ensure the
highest level of transparency.”
Anghel adds that all
38
communications channels are
open. “We used instruments
for communication and public
consultation such as polls,
themed contests and public
debates. At the same time, we
used the print and electronic
media.” All the plans are available
for download.
Dinu Bumbacea, a partner at
PwC Romania, says the mayor
deserves wide recognition. “His
long-term plan was a novelty
for Romania. We were used
to mayors with short plans,
four years at most. He created
an urban plan for the next 20
years. The public consultation
was significant too. He insisted
everyone be asked for their
opinion. It’s the same with his new
plan, called the CiViC plan, which
stands for creativity, initiative,
integration and communication.
He asked residents’ associations,
local councils, the business
community – everyone.”
Naturally, such regeneration
takes money, which is where PwC
comes in. Bumbacea explains:
“We plan to help Baia Mare
apply for EU money. There are
grants if you know how to apply.
Romanians need to improve their
ability to apply for grants – I think
“To maximise the effectiveness
of the plans’ implementation,
Ekaterinburg’s authorities are
working closely with consultants”
M.i. maksimov, First Deputy Prime Minister,
Minister of Economic Affairs and Labour,
Sverdlovsk Region Government
we still aren’t good enough. PwC
can draft the applications thus
maximising the chances that the
city will get its fair share.”
The city may now need to
consider more radical plans if it
is to continue to fund its strategy,
Bumbacea says. “Public-private
partnerships could work. Certainly,
public and EU money is limited.
Partnerships could fund public
projects and be win-win. We are
having discussions about this
subject with the government, and
something may happen.”
Undoubtedly, Baia Mare
is ready for the next step.
Bumbacea says you only have to
walk down the street to see the
improvement. “I remember in my
youth everything seemed quite
dark. There was a cement plant
on the way to the mountains, and
it made everything grey. They
had no filters. The change now
is like night and day. Everything
is green. We are adopting EU
standards and the city is quite
environmentally friendly.”
Russia’s star performer
On the other side of the Urals,
Ekaterinburg had a head start
on Baia Mare. A romantic city
boasting Palladian architecture,
with a hinterland of heavy
industry, it has always had the
potential to rival St Petersburg
as Russia’s second city. The
Antei 3 skyskraper is the tallest in
Russia outside Moscow, and the
presence of consulates from most
of the world’s major economies
signal the city’s commercial
eminence.
The challenge for Ekaterinburg
has always been to live up to its
potential. Few other cities enjoy
such natural resources; half the
region’s wealth comes from metals
(see pie chart, p.41). For two
centuries, it has supplied Russia
 growth in cee

with steel and copper. first deputy prime minister, minister

The government of the
Sverdlovsk region, home to
Ekaterinburg, has put in place
a socio-economic development
plan that runs to 2020, which
seeks to maintain and build on
the region’s role as the economic
dynamo of Russia. Ekaterinburg
itself is focused on implementing
a 2005-2015 strategic plan –
extended to 2020 last year – that
covers all aspects of urban
and economic development. A
of economic affairs and labour,
Sverdlovsk region government.
PwC has recognised
Ekaterinburg’s potential and in
February opened its sixth Russian
office there. The firm has built up
a strong client base in the region.
It already audits huge companies
such as Gazprom Transgaz and
VIZ-Stal, and is expanding into tax
and consulting.
Starting point
fact file:
ekaterinburg
• Location: Sverdlovsk
region, Russia
• Population: 1,401,729
Attracting investors
To promote Ekaterinburg
• Mayor: Arkady Chernetsky
and the Sverdlovsk • Founded: 1723
region, PwC has written
a comprehensive guide • Economy: Metallurgy,
to the area for investors
entitled Guide to engineering and defence,
Investment utilities and mining
Volume 6 Sverdlovsk
Region. The report can be
ordered from publications.
uk@uk.pwc.com

separate urban development PwC’s first mission is to promote

plan will see Ekaterinburg more
than double in size to 114,000
hectares by 2025. Thirty industrial
sites will be relocated outside
the city to make way for private
flats and 870km of new roads
will be built.
“In order to maximise the
effectiveness of the plans’
implementation, the region’s
authorities are working closely
with consultants from leading
international and Russian
companies and financial
institutions,” says M.I. Maksimov,
Ekaterinburg on the world stage. Broad appeal: Ekaterinburg’s challenge
In February, Peter Gerendasi, is to live up to its potential – it is an
attractive city with plentiful natural
managing partner of PwC Russia, resources, an industrial hinterland
and Victor Koksharov, prime
minister of the Sverdlovsk region,
signed a co-operation agreement
in which PwC agreed to provide
consulting services to the local
authorities, to help develop an
industrial strategy and to transmit
the message of Ekaterinburg and
Sverdlovsk to the wider world.
“This collaboration is aimed
at increasing the region’s
investment appeal and optimising

PricewaterhouseCoopers 39
 2019
2019
Which
Which direction
direction
will
will your
your family
family
business
business take?
take?

2009
2009
Will you own it? At PwC our Private Company Services team is
Will you own it? At PwC ourtoPrivate
dedicated workingCompany Services
with family team is
businesses – large
dedicated
and small –totoworking
envisionwith
thefamily
future businesses
and achieve– the
large
and small – to envision thefamily.
future With
and achieve
over 150the
Will your family own it? goals of yourself and your
Will your family own it? goals of yourself
years experience andwe
your family.
pride With over
ourselves 150
on building
yearsterm
long of experience we pride
relationships. ourselvesyou
So supporting on building
as you
Would you have sold it? long termyour
position relationships. So supporting
family business you as
over the next 10 you
Would you have sold it? position your family business over the next
years is a challenge we would like to take up. 10
years is a challenge we would like to take up.
Please call or email Steef Klop,
Will the special culture Please
Private call or email Steef Klop,
Will the special culture Company Services Leader – CEE
you created still exist? Private Company
+ 420 251 151 806 Services Leader – CEE
you created still exist? + 420 251 151 806
steef.klop@cz.pwc.com
steef.klop@cz.pwc.com

Private Company Services

Private Company Services
© 2009 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

© 2009 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

Sales by industry in Russia’s sverdlovsk
Region (% of total), 2008
Generation and
distribution of energy,
gas and water
11.3 %
Mineral resource mining
5.3%
Other
19.2%
Source: Guide to investment: Volume 6 Sverdlovsk Region, PwC
business processes by preparing
recommendations and materials
by company professionals and
organising various business events
across the region,” says Maksimov.
Victor Ovsyannikov, managing
director of infrastructure financing
at PwC Russia, says investors
rarely need much convincing. “We
recently did a roadshow in London
to promote the city and region. The
region is undoubtedly attractive,
even during a downturn. It is
very well known because of the
importance of its industry. So we
didn’t have to explain Ekaterinburg
much – investors already knew
about the city and region.”
Ovsyannikov says banks
in France and Germany are
particularly keen to fund
investment in Ekaterinburg. “They
have the liquidity and they can
see the potential. The appetite for
projects in Germany, in particular,
is exceptional.”
Clear results
The consequences of the
photolibrary
increased publicity and investment
are visible. A E1bn development
project employs 1,000
PricewaterhouseCoopers
Engineering (incl.defence)
14.6%
Cities of the future
To share insights and
experiences of ambitious
cities around the world,
PwC has published an
in-depth report containing
interviews with 44 mayors
called Cities of the Future.
The report has information
on creating strategies,
which include emphasis
on environmental capital,
technical capital, financial
capital, and culture
and leisure capital. It builds
on PwC’s creation in 2004
of the City and Local
Government Network.
The report can be ordered
from publications.uk@
uk.pwc.com or downloaded
at the publications section
of pwc.com.
growth in cee
construction workers, scheduled
to rise to 3,000 by the end of the
year. Hyatt has just opened a
$107m, 20-storey hotel. RMJM,
Metallurgy the Scottish architecture firm that
49.6% designed Moscow’s City Palace
Tower, is designing a 100m curved
glass block labelled the world’s
first ‘vertical park’. The centrepiece
is the 300m Ural Tower, scheduled
to open in 2012.
Ovsyannikov admits that the
global economic crisis will delay
the opening of these buildings.
“Construction work has slowed.
The economy is very dependent
on the metals trade, and, as you
know, the prices of metals are
down by as much as 70%.” This
isn’t dampening his optimism,
however. “The region undoubtedly
has huge potential in industrial
manufacturing. We have the
infrastructure, partly as a result
of production being moved to
Sverdlovsk during World War Two.
In defence, aircraft manufacturing
and oil and gas equipment there are
huge opportunities for investors.”
Maxim Matsiborko, partner
and head of PwC’s Ekaterinburg
office, says: “We are here for the
long term and that in itself sends a
signal to foreign investors that the
business climate is right.”
Both Ekaterinburg and Baia
Mare have learned that if you
create the right environment,
investors always beat a path to
your door. When you are creating
a new reputation for a city nothing
– not even a global economic
downturn – must be allowed to
stand in your way. n
“We are here for the long term
and that in itself sends a signal to
foreign investors that the business
climate is right”
maxim matsiborko, partner, pwc
41
specialreport
Business recovery

As good times turn to bad,

Transform explores how businesses
across the region are facing up to
a tough new reality. In this special
report, we examine the critical
and growing role of business
recovery teams (p.44), the art of
effective cash management (p.50),
how businesses can better fight
fraud (p.43), and prepare for the
eventual economic recovery (p.53).

Swimming against the tide?
John
Wilkinson
In the downturn,
many distressed
businesses in
CEE are fighting
fraud risks
I
n the wake of the credit
crunch, those charged with
the governance of some of our
largest private sector companies
have had to focus on short-term
measures to address the risk of
corporate failure. As the economic
tide goes out, new threats are
emerging from under the water:
evidence of fraud and wrongdoing
in the past, and a greater
motivation to commit it now.
The Madoff affair and similar
scandals might seem too out of
this world for most companies
to seriously worry about. But in
CEE we are seeing instances of
fraudulent borrowing or fraudulent
investment management
“Corporates are
discovering that they are,
or were, more vulnerable
to the threat of fraud than
they thought”
PricewaterhouseCoopers
coming to light. Corporates are
discovering that they are, or were,
more vulnerable to the threat of
fraud than they thought, often
in their treasury and banking
operations. There is a greater
temptation for staff to meet targets
by trading beyond their authority,
and for owners to massage the
numbers they provide to banks or
provide inadequate valuations of
pledged assets.
We are currently investigating a
case where a borrower has simply
moved their encumbered assets
offshore and claimed trading
losses. In another case, a bank
discovered when trying to attach
on collateral that the security for
a loan was not in fact owned by
the borrower. In both cases the
options for recovering the loss are
limited: after establishing the facts
and the fraud trail we try to help
the bank and its lawyers to secure
value out of the assets or against
the borrower’s other assets. But
the lesson here is that prevention
(i.e. adequate anti-fraud measures)
is better than cure.
Ask the difficult questions
Boards of directors and
management need to look more
carefully at their risk management
and control measures. These
are the questions you need to
ask yourself:
l Do you have a workplace
culture that truly promotes and
encourages ethical behaviour?
l How confident are you that
management and employees
are aware of the fraud control
processes in place?
comment
l Your best fraud detectors are
your employees. Are they really
able to report suspicions of
fraud or corruption without fear
of retribution? Do you seek
their feedback?
l Is your organisation insured
against the risk of loss arising
from fraud?
Set the tone at the top
Economic crimes are committed
not by organisations but
by individuals making the
wrong decisions. Boards of
directors, audit committees and
management have a fundamental
role to play in fraud prevention
and detection. In an increasingly
challenging economic
environment, the tone coming
from the top of an organisation is
critical. Companies that actively
encourage transparency and all
stakeholders to make the right
ethical decisions will be far better
placed to prevent and detect
fraud and wrongdoing than those
that ignore the issue.
Difficult conversations and
measures requiring corporate
courage may be needed at some
or all levels of your organisation.
Following up when something
“doesn’t feel right” is key. n
John Wilkinson, partner, is the
leader of PwC’s forensics group
in CEE.
For a more detailed look at these
questions and the strategies adopted
by fraud-savvy organisations, download
our Fraud in a Downturn publication at
www.pwc.ru/change/eng.
43
Back to life
As CEE’s economic crisis deepens, demand for business recovery experts
is increasing. What services can struggling companies expect to receive?
Words: Cesar Bacani and Don Durfee
A
pioneer in business
recovery services in
eastern Europe, Petr
Smutny worked to rescue
LG.Philips Displays Czech
Republic a few years ago.
The colour TV picture tube
manufacturer had been plagued
by legal and environmental
problems. The final blow was
struck by television’s rapid shift
to flat panel displays. “There
were 20 businesses [around the
world] in the group and all went
bankrupt,” recalls Smutny, who
is partner in advisory services at
PwC in the Czech Republic.
He put together a team in 2006
to keep the Czech unit afloat.
PwC convinced suppliers to
agree to continue deliveries and
negotiated short-term support
from the banks. “Then we went
to court to go through the legal
44
process of restructuring, which
was approved 100% by the
creditors,” recounts Smutny.
The business was sold for some
E10m to a property developer.
“Basically, we increased recovery
about 10 times for secured
creditors and we managed to pay
30% of the claims of unsecured
creditors,” says Smutny.
Trouble ahead
A success story? At that time,
yes. However, earlier this year,
that LCD plant was closed, a
victim of the global economic
crisis. It was not the only
casualty. In Russia, Jonathan
Thornton, a partner in transaction
services at PwC, has seen
a surge in defaults on debt
repayments since Christmas.
“It’s really starting to pick up now
and the expectation is that we’ll
see some further troubles going
forward,” he says.
In Romania, Emilian Radu, a
partner in advisory services at
PwC, estimates “something like
25% of small and medium-sized
companies might disappear,
mostly because of lack of access
to financial resources.”
Demand for business recovery
services is booming as a result.
But CEE is not proving an easy
environment for turnaround
specialists. There is a dearth
of professional managers and
technical experts, making it hard
to staff recovery efforts. Also,
some company owners refuse
to accept that their businesses
may have to close, wrongly
believing that governments will
not allow wholesale failures.
Above all, the sheer weight of
their clients’ problems can prove
 overwhelming. From the heady
days after the Soviet Union’s
dissolution in 1991 through the
transition to a market economy,
CEE entrepreneurs often gorged
on easy credit and over-invested
in core and non-core business
areas. Many borrowed in euros,
US dollars, sterling, Swiss francs
and other foreign currencies.
Now, of course, these currencies
have surged against their home
currencies even as demand
for CEE’s export products
has cratered. Fixing many of Republic that Smutny heads.
these companies will take an A textbook turnaround process
extraordinary effort – at least in typically follows five phases,
some countries. It is worth noting starting with analysis and ending
that the crisis has not had a with rebirth (see box, p.47) but
uniform impact across CEE. not all turnaround efforts unfold
so neatly. In Russia, turnaround
Why turnaround? specialists start with an extra
Restructuring is actually part of the stage: education. “I think there’s
normal business cycle. It can help a a belief by many Russian
company manage its growing pains, companies that they’d be bailed
resuscitate an enterprise limping out by the government,” says
under heavy debt and invigorate a Thornton. Moscow has spent
tired and aging organisation. around a third of its foreign
Consultancy firms such as PwC currency reserves to support
have long offered restructuring the rouble, but it is now trying to
as part of their business recovery preserve its holdings. That means
services. In 1988 they helped stepping away from bailouts of
form the Turnaround Management any individual company. But, says
photolibrary

Association (TMA), which now has Thornton, “because the problems

9,000 members in 45 chapters, in Russia were triggered by a
including one in the Czech global crisis, many view it as

PricewaterhouseCoopers 45

something outside their control.”
The next few quarters should
be an eye-opener. “Pre-crisis,
people were expecting growth
of around 6% to 7% this year.”
says Thornton. “The latest figure
from the government is a 2.2%
contraction.” It could even get
worse. “In Q1, the economy
already contracted by 7%,” he
adds. “In January and February,
manufacturing production was
down about 14% each month. So
a 2.2% [contraction] for the full
year – that’s pretty optimistic.”
Difficult times
PwC Russia is working with
several ailing companies. One
of them is a major industrial
manufacturer. Anna Beattie,
director of business recovery
services, says: “They’re a good
example of what we’re seeing
in terms of financial difficulties.
Their industry has been hit very
photolibrary
hard and very quickly. Late last
year they reduced their workforce
by about 25%-30%, and their
46
“Liquidity is the real issue here.
It’s difficult to get financing
or to refinance. Some of the
government banks are helping
to support companies, but
the interest rates are around
20% or more”
Anna Beattie, director, PwC
production has been around 50%
of what it was the same time last
year. And the confirmed orders
for their product have really just
dried up. They have debts with at
least 15 foreign and local banks
and have bonds outstanding.”
The other clients are in slightly
better shape. “Two companies
actually have sufficient demand
for their products,” says Thornton.
“But they’re suffering from
working capital shortages and
cannot run at full capacity.” The
problem is that they have rouble
earnings and primarily US dollar
debt – a lethal mismatch. On 3
April, the rouble was at 33.65 to
the dollar, down 42% from a year
ago. “Liquidity is the real issue
here,” adds Beattie. “It’s difficult
to get financing or to refinance.
Some of the government banks
are helping to support companies,
but the interest rates are around
20% or more.”
The recovery work is still in
the early stages, in part because
PwC has first to clean up the
clients’ financial reporting. “One
of the problems with Russian
companies is they are less good
at producing accurate and reliable
financial information, particularly
forecast information,” says
Thornton. “So there’s a lot of work
understanding the current and
forecast position of the company.”
What PwC is trying to help them
avoid is bankruptcy. “It’s much
better if we can find a solution
where the company continues as
a going concern,” he says.
Avoiding bankruptcy
A similar dynamic is at work in
Romania. “There were many
bankruptcies in the post-
Communist period after the
1990s, when the economy
restructured,” says Radu,
who was the first executive
president of the Romanian
National Insolvency Practitioners
Association in 1999. “But now
this crisis is not at the level of
the company, sector or country.
It’s a global crisis. And the
consequence is that there is
a lack of liquidity in case you
want, for example, to sell a
 Art of the turnaround

The turnaround specialist typically
embarks on a five-phase process. The
first is a thorough analysis. A key area
for analysis is the three requirements
for viability: having one or more viable
core businesses, adequate bridge
financing and sufficient organisational
resources. Specialists also make a
detailed assessment of strengths
and weaknesses in the company’s
competitive position, engineering and
R&D, finances, marketing, operations,
organisational structure and personnel.
It is a good idea to engage attorneys
at this early stage of the process, says
Neil Torpey, partner with Paul, Hastings,
Janofsky and Walker. In particular, it is
important for lawyers to carefully review
the loan documents – what are the
triggers for default, what remedies are
available, and what governing laws are
involved? One major consideration is
whether there are other financing sources
in the capital structure that would
cross-default if one convenant is violated.
“You have to ask, if you bust a covenant,
does the whole house of cards come
down?” says Torpey.
Once the major problems are
identified, the turnaround specialists
develop a strategic plan with specific
goals and detailed functional actions
and sell it to the board, management
team and employees. When particularly
dire problems are found, the plan may
be simple but drastic: mass lay-offs and
elimination of entire departments, an
emergency surgery aimed at stopping the
bleeding and enabling the company to
survive in the short term.
At the third stage, the CEO, CFO and
weak board members may be replaced.
Even if incumbent managers are willing to
implement changes, they often lack the
credibility or objectivity to do so because
they are viewed as having caused or
contributed to the problems.
The specialists then focus on the
restructuring itself. An important aim is
establishing a positive operating cash
flow quickly and raising enough money to
fund the turnaround strategies. In many
ways, this stage can be the most difficult
of all. Eliminating losses is one thing, but
achieving an acceptable return on the
firm’s investment capital is quite another.
If the core business has been irreparably
damaged, bankruptcy may be the only
realistic option.
In stage five, the specialists ensure
the emphasis on profitability and
return on equity is embedded in the
company’s DNA. “This final step cannot
be successful without a psychological
shift as well,” says the Turnaround
Management Association. “Rebuilding
momentum and morale is almost
as important as rebuilding return on
investment. It means a rebirth of the
corporate culture and transforming
negative attitudes to positive, confident
ones as the company maps out its future.”

distressed business. So the name of the Insolvency Practitioners in numbers limit themselves to being the
of the game is not bankruptcy. Association. “It was a good

The name of the game is
rescheduling, restructuring and
reorganisation, because right now
there’s no powerful demand to
absorb distressed assets.”
In Romania, says Radu,
companies are not claiming that
the government will bail them out.
Indeed, the state has little room
to manoeuvre. The economy
is so bad that the International
Monetary Fund (IMF), European
Union and World Bank are
providing Romania with E20bn
in emergency aid. Fortunately,
the financial system remains
comparatively healthy. Radu had
met with the IMF delegation in his
capacity as honorary president
surprise for them to find that the
Romanian banking system is
quite strong,” he reports. “The
only risk they could see was
mother banks in Austria or France
or another country requesting
local units to stop financing
lines or withdrawing part of their
reserves to the home country.”
Standing back
In about half of the cases PwC
Romania works on, the owner also
runs the company. “This is a real
problem because they are unable
to turn over management to
professional managers when the
company becomes too complex,”
Radu says. “They should just
42%
owner, hire good professional
management and just agree on
strategy, mission and so on.”
This is one of the points in
PwC’s action plan for a current
The drop in business recovery client. Radu
value of the rouble and his team are now setting
during the course up a new corporate governance
of a year from 3 structure, including forming a
April 2008 through board consisting of professional
to 3 April 2009 directors and a new CFO.
“We are contemplating that,
for an initial period, somebody
from PwC will be transferred
to the corporation, although he
or she will be under the direct
control of top management and
the owner,” says Radu. “We will
be able to spare that person
for a few months while we are

PricewaterhouseCoopers 47
 loan savers
The global economic slowdown has
arrived in eastern Europe, and it
is not only the region’s corporates
that are feeling the pressure – many
banks are now struggling with
swelling portfolios of bad loans.
This is prompting many to look to
restructuring experts for help with
their ailing loan portfolios.
One of the recent non-performing
loan (NPL) transactions was
completed by Poland’s largest
privately owned bank, Bank Polska
Kasa Opieki (Bank Pekao). The bank
finalised a major project to clear
its balance sheet of NPLs. Many of
those loans dated from an earlier
slowdown in Poland: the 2001-03
downturn that left many borrowers
unable to repay their debts.
Managers of the bank decided to
bring in PwC experts to support
them in the loan disposal process.
“Rather than work out these loans
internally, the bank wanted to find a
more efficient solution,” says Janusz
Sekowski, director of advisory
services for PwC in Poland. The
answer was to sell the loans to third
parties. The transaction was the
largest of its kind in Poland’s history:
the loans carried a face value of
about E450m.
Step by step
PwC guided the bank through a
multiple-staged process. First was a
portfolio review. The team classified
the loans by various criteria,
including borrower type, size and
type of collateral. Such groupings
matter because investors specialise
in different sorts of distressed
loans, and may pay a premium for
a subportfolio that closely matches
their investment profile.
The team then estimated the
portfolio’s value, selecting a sample
photolibrary
of more than 150 loans. This required
intensive work by a team of up to
48
recruiting somebody, and then
we’ll just support the new CFO,
and monitor and jointly assist the
company in implementing the
restructuring plan,” he continues.
In the Czech Republic, Smutny
is also looking for CFOs and
other managers – but it is difficult
to find them. “This morning I
just had two calls reiterating
the need for such people,” he
says. “Unfortunately, there are
not many bona fide experts in
crisis management, and even
fewer who do not have any side
interests and meet the criteria
of being entirely honest and
10 professionals who examined the
straightforward in their position
loan terms, estimated the worth of
so that all stakeholders can
the underlying collateral, and ran a
fully trust them.” The need is
discounted cash flow analysis.
for both clients and the PwC
The team then decided that the
business recovery services
best structure was to securitise the
unit. “I’m constantly looking for
loans in two different tranches. With
good people, but when you find
this plan in hand, PwC approached
somebody, he or she gets tied up
potential investors. After signing
for six to 12 months in the client
non-disclosure agreements, the
company and then you need
investors were provided with
to continue to search for a new
detailed information about the
one,” says Smutny.
portfolio. PwC did this via a secure,
web-based platform that enabled
the investors not only to review all of
Rising demand
This lack of talent is only likely
the necessary documents, but also
to become a bigger problem as
facilitated the question-and-answer
he expects demand for business
process. “These were international
recovery services to continue
investors,” says Sekowski. “Although
rising. “I do not see any sign of an
they had local due diligence teams,
upturn in the Czech economy yet,”
they also pulled other people from
Smutny says. “The businesses
other locations onto the project.”
that are considered healthy, I’m
The investors submitted their
afraid you’ll see that they are not
bids and Bank Pekao selected one
really healthy. They do not have
for each tranche. The timing was
good cost structures and are not
good. By selling the NPLs, the bank
managed well.” Foreign exchange
was able to improve its liquidity and
is also a headache, although it is
boost its capital adequacy ratio –
more a hedging issue rather than
before Poland felt the full effect of
a mismatch between borrowings
the global slowdown.
and earnings. Exporters had
“The bank was fortunate,” says
hedged at 25 koruna to the euro,
Sekowski. “They managed to
but it has now shot up to 28 – at
complete this transaction before the
a time when revenues have been
major economic crisis broke out.”
halved by the global crisis. “All
these businesses have massive
Tough times
GDP across most CEE countries is expected to dip before showing signs of recovery in 2011.
As economic conditions weaken, experts predict more corporate difficulties – and turnarounds.
Country 2008%
Bulgaria 6.0
Croatia 2.2
Czech Rep 3.5
Estonia -3.5
Hungary 0.5
Latvia -4.6
Lithuania 3.2
Poland 4.8
Romania 7.7
Russia 5.6
Ukraine 2.1
Source: Economist Intelligence Unit
hedging losses that are killing
them,” he says.
Is it too early to tell whether
the recovery efforts will succeed?
“The sooner we can get in to help,
the better, because as time goes
by, things get worse and worse
and the company’s options get
fewer and fewer,” says Thornton,
in reference to the reluctance of
Russian companies to call in the
recovery consultants. But the
situation is changing, not least
because the banks are insisting
on a credible restructuring plan
before they ease loan terms or
extend new financing. The high-
profile restructuring of companies
such as Rusal, the aluminium
giant, also underscores the reality
that bailouts are not forthcoming.
Still, education efforts need to
continue. “One thing that hasn’t
been happening much is gaining
consensus between different
creditors,” notes Thornton. “Some
lenders are suing the company
for recovery of specific assets,
rather than looking for a broader
solution. This is partly based on a
lack of trust and communication
PricewaterhouseCoopers
needed or they can’t get approval at
the right level,” says Thornton.
In the Czech Republic, Smutny is
counting on the newly formed TMA
2009% estimated 2010% forecasT 2011% forecasT chapter to help deepen the talent
-1.9 1.1 3.7 pool. “Because restructuring is an
0.4 1.8 3.6 area where a lot of corruption can
exist and weird transactions may
-2.0 1.6 3.8
happen, we decided to build on
-8.0 -1.5 2.8
very strong ethical and professional
-4.5 0.4 2.7 standards,” he explains.
-12.0 -2.0 1.5
-8.0 -2.5 2.9 Clean-up required
There will be legal hurdles in
0.7 2.0 3.2
many places. While countries
-1.8 3.1 4.9
like Romania, for example, have
-2.0 3.0 4.5 modern insolvency laws, matters
-10.0 1.0 3.5 are murkier elsewhere. Russia, for
example, has a largely untested
insolvency regime for corporations,
according to Logan Wright, a
and limited experience in applying partner with law firm Clifford
sophisticated solutions in getting Chance in Moscow. There is no
the company going again. debtor-in-possession provision,
“There also seems to be an the auction process for collateral
attitude among certain banks may not be transparent, and
that results in an unwillingness in there is a general concern that
principle to consider writing off or foreign creditors do not always
restructuring any debt. So if you put get a fair hearing in Russian
a feasible commercial solution in courts. “Creditors typically say
front of the creditors, it may be voted the last thing they want here is an
down by certain banks because they insolvency process,” says Wright.
don’t understand that this is what is In the end, the onus is on
the company to follow through
with the action plan, assuming
the creditors sign off on it. A
lot depends, in turn, on its
relationship with the turnaround
consultants. “Initially, some clients
are quite hostile because they had
to hire us under pressure from the
banks,” Radu concedes. “But it’s
a step-by-step process of getting
“Initially, some clients are quite to know one another. There is no
hostile because they had to other way but to adjust to a more
professional way in approaching
hire us under pressure from the the business plan.” Many such
banks. But it’s a step-by-step friendships need to be forged in
process of getting to know CEE if vulnerable enterprises are
to survive the economic crisis –
one another” and emerge leaner, stronger and
Emilian Radu, partner, PwC more profitable. n
49
 Flow motion
If they haven’t already, executives are pushing cash
management to the top of the corporate agenda
W
hen it comes to cash
management, individual
companies in CEE face
several unique challenges on top
of those that stem from the global
economic slowdown.
The tendency to borrow for
short durations and rely on
regular rolling renewals has many
companies feeling the pinch,
notes Alan Vaksman, a partner
in financial services advisory for
PwC in Moscow. Firms need to
map out their ‘lines of defence’
should refinancing become
unworkable. Additional advice
about effective cash management
needs to be tailored to a
company’s circumstances, adds
Lukasz Bystrzynski, a partner at
PwC in Warsaw. A crucial factor
is whether a company or its key
banking partners are foreign-
owned. A foreign-owned firm may
have less leeway to manage its
cash flows, and a bank less scope
to lend, when issues facing a
troubled parent in the West trickle
down, Bystrzynski says.
Whatever the circumstances,
most executives place cash
management at the top of their
agendas. More than 70% of
managers in Russia surveyed
by PwC at the end of last year
said they planned to finance
istock
future investments with their own
resources. “In a downturn, liquidity
50
is often more important than
profitability,” says Bystrzynski.
There is no need to remind
Yevgeny Pogorelov of that. The
chief financial officer of Samson, a
Russian office supplies distributor
and retailer, says he is “doing a lot
of things differently” now. When
the rouble’s devaluation led to
interest rate hikes by the country’s
central bank, he had to act fast
to preserve cash, as the burden
of debt repayment grew heavier
and foreign suppliers demanded
cash on delivery. After opening its
newest branch in June, Pogorelov
will probably halt all new
investment and focus on paying
down debt. But he says the most
crucial thing will be to refine his
monthly cash flow forecasts. Even
with three-quarters of a credit line
available, he does not want to
take chances with working capital.
“The companies
that take liquidity
the most seriously
are including cash
management in
their business
continuity plans”
Alan vaksman,
partner, PwC
“A realistic cash flow forecast
will also go a long way when it
comes to negotiating with banks
to extend or keep credit lines,”
says Vaksman. Until recently,
many banks were willing to lend
based solely on collateral. Now,
they need to see that a company
can construct detailed cash
projections, a practice that is
not always followed in CEE. The
companies that take liquidity the
most seriously, Vaksman notes,
are including cash management in
their business continuity plans.
Added complications
But even the most sophisticated
corporate planners in the region
are finding that foreign exchange
fluctuations complicate matters.
At the end of 2008, Russian
companies rated by Moody’s
had $144bn in foreign currency-
denominated debt, with $39bn
coming due this year. Amid the
turmoil of the first two months of
2009, the equivalent in roubles
soared by more than 20%,
Moody’s estimated. With around
$8bn in debt – less than 20% of
which is denominated in roubles
– mobile operator VimpelCom
cancelled its dividend in February,
and a month later announced a
30bn rouble bond and an 8bn
rouble loan to refinance its existing
foreign currency debts.
 Around the same time, when a stress tests. Firms can then look
devaluation of the Kazakh tenge for natural hedges, and keep a
cut its value against the dollar by close eye on working capital.
almost a quarter, Kazakhstan’s On governance, Bystrzynski
largest bank, BTA, saw non- advises companies to enact
performing loans soar as borrowers stricter controls on decision-
found it difficult to repay foreign making authority. This will
currency-denominated debt. A drive greater management
large government intervention was accountability. As hard as it may
required to prop up the institution, be, given the anger directed at
which ceased principal payments financial institutions for their role
on its debt in April. As recently as in the downturn, companies will
December, the bank described its see long-term cash management
own foreign debt obligations as benefits from forming partner-to-
“entirely manageable”, a potent partner relationships with banks,
reminder of how swift and severe Bystrzynski says. Both sides
the downturn has been. An even have had a tendency of abusing
more dramatic currency collapse their positions, he adds. In the
in Hungary – the forint lost more future, transparency, honesty and
than 40% of its value versus the trust should guide relationships.
dollar between July and March – is No company, of course, would
also punishing companies of all suggest anything less. “It may
types. Even in Poland, where the sound simple, but past experience
economy is performing relatively shows that this is not always the
well compared with most of its case,” he says. n
neighbours, firms are coming under
plenty of pressure. For example,
the ballooning value of foreign-
Taxing times
currency debt at oil group PKN
As companies scramble to
Orlen brought about a covenant
renegotiate debts, they cannot
breach as the company’s net-
ignore potential tax implications,
debt-to-EBITDA ratio more than
notes Ekaterina Lazorina (pictured),
doubled during 2008. In addition
a partner at PwC in Moscow. In
to the interest rate hikes that often
Russia, for example, the limits on
accompany debt renegotiations,
interest deductibility were recently increased – from
companies may also face tax
15% to 22% for foreign-currency loans, and from
issues (see box).
1.1 to 1.5 times the central bank refinancing rate
for rouble-denominated debt. However, this may
Beyond engineering
still not be enough, Lazorina says, as the punitive
Given that financial engineering
rates that beleaguered banks now demand during
alone is unlikely to address
renegotiations may rise even higher than the new
companies’ cash management
limits. A deductibility dilemma also faces the foreign-
challenges, Bystrzynski suggests
owned subsidiaries in CEE that may be close to
some improvements.
breaking thin-capitalisation limits – and thus the
On the operational side, the key
ability to deduct interest from taxes – because of
is tighter cash planning. Improving
the rising burden of foreign-currency intercompany
management information systems
loans. Potential solutions may include changing the
and processes can help to
currency of a loan or rerouting loans from a parent via
compile the detailed information
a sister company, but neither of these options is easy,
about cash positions and
nor is the tax authorities’ potential reaction clear.
forecasts that will allow managers
to run various scenarios and

PricewaterhouseCoopers 51
In times of trouble,
experience is your
biggest asset.*

When things start to look a little uncertain, it helps to

have someone on your side who’s been there before.
Someone committed to your interests, with the most
extensive range of expertise in turnaround, restructuring
and insolvency, at your service. And above all, someone
who can provide innovative solutions to the issues you’re
facing. To find out more visit www.pwc.com/brs

*connectedthinking
© 2009 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

Divest to avoid distress
Lev
Holubec
T
he current economic
downturn has significantly
altered the near-term
growth prospects of the majority
of businesses across most
sectors. For some, even long-term
prospects are now about survival
rather than growth.
Many CEE companies have
yet to feel the full impact of the
crisis. Many are relatively young
– surfacing only after the fall
of the Berlin Wall – and are yet
to experience navigating such
harsh and sudden changes in
the economic cycle. There might
not be a more appropriate time
for CEE companies to refocus on
their core businesses as a means
to realise value in the form of cash
flow, from selling underperforming
or non-core assets.
The decision to divest a
business is seldom easy,
“The decision to divest
now depends on
whether the sale of any
of the parts preserves or
increases the value of the
remaining operations”
PricewaterhouseCoopers
While the decision to divest is
never easy, companies should
take the opportunity to refocus on
their primary objectives and save
their core assets
particularly for the region’s
proud entrepreneurs who built
their businesses from scratch or
privatising and turning around
state enterprises. Furthermore,
sellers now outnumber acquirers.
Multiples earned on the sale
of business have significantly
decreased and, at times, are near
or even below zero times EBITDA.
Thus the mathematics of
whether to divest might no
longer be based on determining
whether the sum of the parts
carries greater or lesser value
than the whole. Instead, a more
appropriate equation might be:
“Will the sale of any of the parts
preserve or increase the value of
the remaining operations?”
What to divest?
So which operations should
remain with the business, and
which should be separated?
Determining what to divest need
not be entirely traumatic – there
are also benefits. Identifying core
and non-core assets will help a
company see what is bleeding
and what is generating cash. It will
help to crystallise how the ‘group’
benefits each individual business.
This can also reassure banks
comment
about the focus of a company’s
ongoing business strategy, making
it easier for them to assess the
risk of restructuring loans.
When preparing to divest non-
core or underperforming assets,
a business must present a ‘fit for
purpose’ financial and operational
model. To best encourage
competition for that asset, the
model must be accompanied by
a plan that convinces potential
buyers the asset will be viable.
A seller who can do that will find
a broader set of buyers who are
interested in a quick decision and
willing to pay more.
Many CEE companies are
realising that a rough road lies
ahead. That road will challenge
the stability of even the best
businesses and will certainly
bend, and maybe break, the over-
leveraged. Some firms will revisit
core objectives and separate and
divest certain assets. Others will
continue their attempts at cost
reduction – and many will ultimately
meet their fate in the processes
associated with distress. n
Lev Holubec, a PwC partner based
in Ukraine, leads M&A Integration
Consulting in CEE.
53
 data centre>
PwC Recent economic performance and forecasts (percentages)

Russia 2006 2007 2008(e) 2009(f) 2010(f) Sources

GDP growth 7.3 8.1 5.5 -2.5 1.1 1, 2, 3, 4

Inflation 9.7 9.0 14.1 10.2 7.0
Consumer spending growth 11.2 12.8 9.7
Investment growth 17.7 20.8 1.6
Exports growth 7.3 6.4 -0.8
Unemployment 6.7 5.6

Poland 2006 2007 2008(e) 2009(f) 2010(f) Sources

GDP growth 6.2 6.6 4.8 -0.2 1.1 1, 4, 5

Inflation 1.3 2.5 4.2 2.5 2.8
Consumer spending growth 5.0 5.0 5.3
Investment growth 14.9 17.6 7.9
Exports growth 14.6 9.1 5.8
Unemployment 13.9 9.6 7.1

Czech Republic 2006 2007 2008(e) 2009(f) 2010(f) Sources

GDP growth 6.8 6.0 4.4 -2.5 0.5 1, 4, 5

Inflation 2.5 2.8 6.3 2.7 2.4
Consumer spending growth 5.4 5.3 3.2
Investment growth 6.5 6.7 4.5
Exports growth 15.8 14.9 11.1
Unemployment 7.2 5.3 4.4

Hungary 2006 2007 2008(e) 2009(f) 2010(f) Sources

GDP growth 4.1 1.1 0.5 -5.0 0.6 1, 4, 5

Inflation 4.0 7.9 6.0 2.1 3.5
Consumer spending growth 1.7 0.6 -0.7
Investment growth -6.2 1.5 -2.6
Exports growth 18.6 15.9 4.6
Unemployment 7.5 7.4 7.8

Kazakhstan 2006 2007 2008(e) 2009(f) 2010(f) Sources

GDP growth 10.7 8.5 2.3 0.1 2.1 1, 3, 4, 6, 7

Inflation 8.6 10.8 16.8 9.2 9.5
Consumer spending growth 13.8 10.0
Investment growth 26.5 10.0
Exports growth 6.9 9.3
Unemployment 7.8 7.3

Romania 2006 2007 2008(e) 2009(f) 2010(f) Sources

GDP growth 7.9 6.2 7.1 -3.8 -0.3 1, 4, 5

Inflation 6.6 4.8 7.9 4.1 3.8
Consumer spending growth 12.7 11.6 9.1
Investment growth 23.5 29.0 19.3
Exports growth 10.4 8.7 19.4
Unemployment 7.3 6.4 5.8

Ukraine 2006 2007 2008(e) 2009(f) 2010(f) Sources

GDP growth 7.3 7.3 2.0 -9.8 -1.8 1, 3, 4, 6, 7

Inflation 9.1 12.8 24.9 17.9 11.0
Consumer spending growth 13.6 5.5 11.6
Investment growth 18.7 12.2 3.4
Exports growth -4.9 6.3
Unemployment 6.8 6.4
Sources: 1. International Monetary Fund 2. Federal State Statistic Service 3. PricewaterhouseCoopers estimate (e). 4. PricewaterhouseCoopers forecasts (f) 5. Eurostat
6. The World Bank Group 7. International Labour Organisation

Spotlight: Exchange rates

Jan 08 JanFeb FebMar
08 08
08Jan 08Feb MarApr
08 08 08 08
08Mar AprMay
08Apr
0808
MayJun
08
May
08 08
JunJul
08Jun JulAug
08 08 08 Jul AugSep
0808 SepOct
0808
08Aug 08 08
08Sep OctNov
08Oct NovDec
0808 0808
08Nov DecJan
08Dec
09 08
JanFeb
09Jan
09 09
FebMar
09Feb
09 09
MarApr 09 09
09Mar Apr 09Apr 09
80 80 80
Jan 08 Feb 08 Mar 08 Apr 08 May 08 Jun 08 Jul 08 Aug 08 Sep 08 Oct 08 Nov 08 Dec 08 Jan 09 Feb 09 Mar 09 Apr 09
80
value index (inverse Jan 2008 = 100)

100 100 100

100
120 120 120

120
140 140 140

140
Source: SunGard PowerData

160 160 160

160
180 180 180

180

Russia Russia Hungary

Russia Hungary
Hungary Ukraine
Ukraine
Ukraine
Depreciating currencies Russia Hungary
in CEE are placing Ukraine
pressure on borrowers in the region, where many loans are denominated in foreign currencies.
A potential debtor crisis could pose a risk for western European banks, as they account for large financial industry market shares in CEE.

PwC Macro Consulting economics.pwc.com PwC CEE Strategy www.pwc.com/strategy

Yael Selfin I +44 (0)20 7804 7630 I yael.selfin@uk.pwc.com Daniel Cappelletti I +420 251 151 333 I daniel.cappelletti@cz.pwc.com

54
 PricewaterhouseCoopers
PricewaterhouseCoopers
named Lead Russia
named Lead Russia
Financial Advisor
Financial Advisor
for 2009
for 2009

Acquisitions Monthly Magazine, the premier

source for international news, features
Acquisitions Monthly Magazine, the premier
and analysis relating to the M&A and buyouts
source for international news, features
industry, has named PricewaterhouseCoopers
and analysis relating to the M&A and buyouts
Lead Russia Financial Advisor for the year 2009.
industry, has named PricewaterhouseCoopers
Lead Russia Financial Advisor for the year 2009.
Winning the award in the first year of participation
confirms PricewaterhouseCoopers as the leading
Winning the award in the first year of participation
provider of financial advisory services in Russia.
confirms PricewaterhouseCoopers as the leading
provider of financial advisory services in Russia.

*connectedthinking
*connectedthinking
© 2009 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

© 2009 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.
Contacts

PricewaterhouseCoopers
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Mike Kubena Clifford Isaak Chris Butler
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MANAGING PARTNER ADVISORY: BOSNIA/SERBIA/MONTENEGRO MACEDONIA

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TRANSFORM
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© 2009 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers” refers to the network of member
firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.
This publication has been prepared as general information on matters of interest only, and does not constitute professional advice. You should
Issue 4/Summer 2009

not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express
or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law,
neither PricewaterhouseCoopers nor Bladonmore accept or assume any liability, responsibility or duty of care for any consequences of you
or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.