Fact box: Population: 38 million (9 in Europe, after Ukraine and before Romania)

This article is from a contributor to our confederation partner WBJ, and appeared on STRATFOR’s “Other Voices” website. It gives a good overview of how Poles perceive their economic “miracle” and how much pride they have for the Warsaw Srock Exchange.

The Warsaw Stock Exchange

October 25, 2010 – Warsaw Business Journal.

As the Warsaw Stock Exchange (WSE) is currently working towards going public, it is worth reflecting on its preeminence in the Central European corporate finance world. In November 2010, the WSE is itself going to be listed on the WSE. The Polish government is selling 63.82 percent of the outstanding shares, but still plans to keep 52 percent of voting rights. With a price range of zł.36-43 per share, the WSE is valued at zł.1.5-1.8 billion (€382-456 million).

With a total market capitalization of some zł.715.8 billion (€174 billion) – 30 percent more than that of the Vienna exchange, and five times the market capitalization of the Budapest Stock Exchange –, the WSE was the third-largest stock exchange in emerging Europe, after Moscow and Istanbul, at the end of 2009.

The WSE has expanded the fastest in the region, more than doubling the number of traded companies and almost tripling daily turnover in the past decade. Over the past five years, there have been over 200 Initial Public Offerings (IPOs) on the main floor of the WSE. In 2009, a year of global doom and gloom internationally (but when GDP in Poland powered forward with a 1.8 percent annual growth rate), 38 IPOs raised approximately €1.6 billion on the WSE and the alternative exchange for small companies, NewConnect. This is a remarkable achievement and today there are a total of 364 Polish and 23 non-Polish entities listed on the WSE, including MOL, CEZ, UniCredit, Astarta, Immoeast, and the Orco Group.

Cheap equity has been one of the growth drivers of the WSE. For many years, the Polish government has required that Polish pension funds invest their funds into Polish equities. Given that the supply of Polish equities has been limited, this means that their prices have been driven up considerably (e.g. enterprise value has often exceeded 20 to 25 times EBITDA for companies listed on the WSE). This has been a boon to Polish entrepreneurs, who have strengthened their balance sheets with the cheap equity raised on WSE IPOs. (This may, however, raise the question of whether Polish pension funds are sufficiently diversified in their equity holdings. It also raises the question of whether all of these small companies should be on a stock exchange, as they may not be in a position to meet growth expectations and, given their low capitalization, may find it difficult to maintain a following among analysts and shareholders, causing their share prices to languish over time.)

Listing on the WSE is also simple for non-Polish companies. After Poland’s accession to the EU, listing a foreign company on the WSE is as simple as listing a domestic company. Poland has adopted the EU single-passport rule, which states that any company registered in any EU member country may make its debut on either the WSE main floor or the NewConnect market without applying for consent from the Polish Financial Supervision Authority. In keeping with the single passport rule, the prospectus of the candidate company may be approved by the capital market regulator in any EU country. The prospectus does not even need to be translated into Polish in its entirety: an English-language version is sufficient.

The WSE has been a phenomenon. Over the past decade, it has been a fantastic advantage to those companies which have been able to raise capital on favourable terms. The IPO reflects the fact that the WSE itself has become big business. However, it will be interesting to see how the next decade plays out, with widespread consolidation of Central European stock exchanges expected. For how long will the EU continue to allow rules forcing Polish pension funds to invest in local equities, and for the Polish government to control the WSE with a type of “golden share” ownership?

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  Recent Wall Street Journal Article on how Poland is branding itself as the financial capital of Central Europe.
  

Poland's Treasury Hustles to Rebrand Warsaw as a Mini-Wall Street

October 25 – Wall Street Journal

WARSAW— Krzysztof Walenczak is trying work himself out of a job.

As undersecretary of Poland's State Treasury, which manages state-owned economic assets, he wants eventually to shut down his ministry. "Then our post-communist transition will be over," Mr. Walenczak says.

Two decades after the fall of the Iron Curtain, Poland is still trying to deal with the legacy of 40 years of communism, when the state owned the commanding heights of the economy—the large swathes of strategic industry still in government hands. Mr. Walenczak is a key player in the government's privatization process. But he seeks to be more than an auctioneer of public assets. He wants to be the architect of a new European financial center.

The two goals reinforce each other, Mr. Walenczak said in an interview.

“Warsaw will never be a City [of London] or a Wall Street, but it doesn't need to be," Mr. Walenczak says. "It's a financial center for the region, with regional leadership in the European Union coming our way."

Warsaw's potential as a financial center, he says, stems from a reform of the country's pension system completed a decade ago that created a group of private retirement funds. All Poles born after 1968 are required to join, and the funds—which as of September held assets valued at 209.47 billion zlotys (about $74 billion), according to Poland's financial oversight office—are legally bound to invest 95% their assets in Poland, mainly in Polish equities and Treasury bonds. The value of the pension fund assets is equal to over a quarter of the entire market capitalization of the Warsaw exchange.

The 42-year-old Harvard Business School-educated Mr. Walenczak first came to prominence in 2008, while he was working as an investment banker for Lehman Brothers and later for Nomura International, advising the Polish Treasury in a long-running dispute with a Dutch investor over the privatization of insurer PZU SA.

In 2009, the dispute was finally resolved in the biggest success to date for a ministry where privatization had ground to a halt—saving the exchequer a possible $12.1 billion payout in an international arbitration case. The settlement also went a long way toward repairing Poland's reputation among foreign investors, bolstering confidence that, when a new political party comes to power, it won't grab back control of assets sold off under a previous administration.

Also last year, Poland's decision to cut its income tax rate, and the resultant economic stimulus, helped it become the only European Union country to dodge recession. But it also sowed the seeds of a ballooning budget deficit. And when this, in turn, prompted the Treasury to undertake an ambitious, new program to sell off billions of dollars in state assets through 2011, the man charged with the task was Mr. Walenczak.

Many analysts doubted the feasibility of the plan when it was first announced. It included selling stakes in heavily unionized KGHM Polska Miedz SA, Europe's No. 2 copper producer by output, and refiner Grupa Lotos SA, seen as strategic to Poland's energy security.

But part of the Treasury's job is promotion, Mr. Walenczak says. The ministry team is out in front of investors, constantly selling Warsaw as the place to be and addressing investors' concerns.

This role as promoter also involves dispelling prejudices against Poland, whose currency suffered in tandem with others in the region following the collapse of Lehman Brothers because some investors lumped together various Central European countries.

"Investors need to be reassured that [Poland] is a normal Western European country, with a normal legal and political framework," Mr. Walenczak says. "Not all global investors are sophisticated enough to know the difference between Poland and Ukraine."

To attract investor interest, Polish Treasury Minister Aleksander Grad does the rounds to New York, Boston, London, Frankfurt, Zurich, and Paris about every three weeks, with slightly less frequent visits to Singapore and Abu Dhabi in between, Mr. Walenczak says.

The ministry also organizes "field trips" to Warsaw for portfolio managers. "We schedule them to meet all the main decision makers in Poland, the central bank governor [Marek Belka], Finance Minister [Jacek Rostowski], Prime Minister [Donald Tusk], Warsaw Stock Exchange Chief Executive [Ludwik Sobolewski], and Grad himself."

"The conversion rate after these meetings has been amazing," Mr. Walenczak says. "It has dispelled a lot of the bias and prejudices."

In a two-week interval in January this year, the ministry sold a 10.8% stake in oil refiner Grupa Lotos and a 10% stake in KGHM Polska Miedz, the heavily unionized copper miner that supports a whole region in southwest Poland.

"We've been able to conduct so many transactions because Poland's economic prospects are attractive and because investors realize we conduct transactions like on Western exchanges," Mr. Walenczak said. "And it's getting easier."

The privatization pipeline is still pumping. Next up is the 1.15 billion zloty initial public offering of the Warsaw Stock Exchange itself, which the ministry sees as a unique opportunity to promote not just the exchange, but Warsaw, and the Polish economy as a whole. And after that, the Treasury's stake in Bank BGZ, in which the Netherlands' Rabobank holds 59.35% stake, goes on the block. In 2011, privatization revenue is seen at 15 billion zlotys.

Mr. Walenczak says each asset sale is evaluated according to two criteria: strengthening the Polish capital markets and raising the competitiveness of the economy. Some companies require a single buyer that can add value by contributing know-how; others are mature enough to be sold through an initial public offering.

Each listing makes the Warsaw Stock Exchange more liquid and encourages large funds to take part in successive privatizations.

"In the first half of 2010, 47% of turnover on the Warsaw Stock Exchange came from non-domestic sources," Mr. Walenczak says. "Funds from 22 countries were represented as buyers of PGE [Polska Grupa Energetyczna SA] shares" when the Treasury sold a 10% share worth €1 billion ($1.39 bilion) in mid-October, he said.

Some market participants say the investment banks currently opening offices in Warsaw, such as Goldman Sachs Group, UBS and J.P. Morgan Chase, won't have anything to do once privatization deals finish up. Mr. Walenczak disagrees.

"PGE will remain on the stock exchange and will have huge financing needs in the future," he says. "We're creating companies which, once they become private, will be dependent on and linked to global financial institutions.

"They'll be issuing bonds, shares and conducting mergers and acquisitions," he says.

The Treasury Ministry is even advising other countries on how to privatize and develop their capital markets, Mr. Walenczak said, but declined to specify which ones.

"Ask New York why it's good being a financial center," Mr. Walenczak says. "It creates the highest-paying jobs, the most comfortable lifestyles, and it's where the intellectual capital is created."

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  Our confederation partner, Warsaw Business Journal (WBJ), looks at the Polish-Russian natural gas deal and a number of other important energy matters for Poland. They consulted us while writing this story.
  

Burning questions

25th October 2010

Poland has struck a new gas deal with Russia, but the country remains stuck between the proverbial rock and hard place. What to do?

“There is no risk of disruptions in natural gas supplies to Poland,” the Economy Ministry declared last week following the resolution of protracted talks over Russian gas supplies. But the negotiation process illustrated, yet again, Poland’s dependence on Russian natural gas.

Energy insecurity is one of the great bugbears of Polish foreign policy and a source of major apprehension in relations with Russia. And this year’s gas negotiations, as in the past, were unpleasant.

“I would like this discussion to be the last one,” said Tomasz Chmal, an energy expert at the Sobieski Institute, a Warsaw-based think tank, summing up the general feeling in Poland.

That’s an understandable desire, but one which will likely go unfulfilled.

The gas, at last

The preliminary intergovernmental agreement reached by Polish and Russian officials secures annual deliveries of 10.2 billion m3 of natural gas for Poland through 2022. The increase (up from 7.4 billion m3) will fill a supply gap of two billion m3 left by a cessation of deliveries from Ukraine in 2009.

Gazprom deputy CEO Alexander Medvedev said the contract, which still needs to be signed at the government level, as well as between gas monopolists Gazprom and PGNiG, would be finalized next week.

Polish PM Donald Tusk has backed the deal, while the Polish energy sector watchdog (URE) has given its official green light.

The EU, whose complaints halted a gas deal back in February, had a representative present at the negotiating table and should see some of its requirements satisfied. The bloc had insisted that the infrastructure transporting gas through Poland be accessible to third parties, and that the pipeline itself be run by an independent entity.

The price of gas in the contract is not yet known but, according to Mr Chmal, they will probably be above market prices. In the short term, however, Poland has no other choice.

A game of influence

The political map of Central and Eastern Europe might have changed a great deal since 1989, but its network of gas pipelines is still a stark reminder of Soviet dominance.

Simply put, Poland is utterly reliant on Russian gas and pipelines. “In the short term there are no other options comparable in volume,” Andrzej Szczęśniak, an independent energy market analyst, stated bluntly.

There’s a commonly held belief in Poland – and elsewhere – that Russia wields Gazprom as a foreign policy tool. And the under-construction Nord Stream pipeline, which is to carry 55 billion m3 of gas directly from Russia to Germany annually, bypassing Poland, makes many in the latter country nervous.

“When the Nord Stream is completed, Russia won’t be pressured by German consumers [to maintain deliveries to Poland] anymore. This is the game,” commented Mr Chmal.

But is it? According to Mr Szczęśniak, Poland’s prime concern should be to improve business relations with Russia and to keep gas supplies out of the realm of politics.

“Poland has weak leverage on Russia because it cut business contacts with Russia four years ago,” he said. “Normally good sense tells you to have the best contacts possible with suppliers. In Poland we have done the opposite,” he lamented.

Marko Papic, an analyst at American intelligence company Stratfor, added that Russia actually has a strong interest in making sure that its relationship with Poland is accommodating.

“Russia needs the EU to stay out of its business as it tries to lock down Ukraine, Belarus and the Caucasus,” he explained. “To do that, Russia needs good relations with major EU countries. Poland has leverage there,” he added.

Proof of this leverage, according to Mr Papic, can be seen in Russia’s “magnanimous” declaration that Poland would not lack gas if the contract was not signed in time.

Alternative options

Poland’s new contract with Gazprom is no substitute for investment in alternative sources, however, as gas consumption is set to rise at a pace that even the increase to 10.2 billion m3 of Russian gas will not cover.

According to Mr Chmal, “14.4 billion m3 [of combined Russian imports and local production] is just the bottom line for Polish demand in the next few years. If the economy grows, and I am optimistic about this, then demand will increase, too.”

For now, the bulk of Poland’s annual gas consumption goes to the chemical and oil-refining industries. Only one-third is used by Polish households, mainly for heating, and almost none goes towards electricity generation.

But this last point might change. Currently around 95 percent of Polish electricity is generated using coal. Although this dependency on coal won’t end any time soon, the country is under pressure from the EU’s climate change package to reduce its percentage in the energy mix.

Gas-fired power plants, although virtually unheard of in Poland, produce only half as much CO2 as coal-fired plants and provide a good balance with less-reliable energy from renewable sources like wind, according to Mr Chmal.

“I think there is room for at least a few gas-fired power plants in Poland,” he said. “If we decide to build them, then 10.2 billion m3 will not be enough.”

Betting on LNG

The option with the best prospects to help meet demand, according to all experts consulted by WBJ, is the liquefied natural gas (LNG) terminal being built on the Baltic coast in Świnoujście.

Construction is going smoothly and the 2.5 billion m3 capacity terminal should be functional in 2014. Supply should not be a problem, as one contract with Qatar has already been signed by PGiNG and other partners appear to be interested.

Another reason to bet on LNG, according to Mr Papic, is that shale-gas production in the US may reduce that country’s demand for gas imports to the point that market prices drop, making new sources more attractive for countries like Poland.

“Instead of buying from Qatar, Poland might want to buy from the Caribbean, which could in the future be looking for new clients,” hypothesized Mr Papic.

Cash flows east, gas flows west

The Baltic Pipe and the Świnoujście LNG terminal are among 43 projects funded by the EU to bolster Europe’s energy infrastructure and lower its dependence on energy imports from Russia. The Nabucco pipeline, designed to pump gas from the Caspian Sea, is another, and one which could in theory benefit Poland. It’s unlikely to be built soon, though, if ever.

“Nabucco for Poland is a fairy tale,” said Mr Szczęśniak. “There is interest, but the product is not viable.”

EU-funded projects that stand a better chance of improving Poland’s energy security include plans to install connections between neighboring countries and enable the reversal of the gas flow in pipes that transport gas from Russia to Europe.

According to Mr Papic, “Central Europe currently has myriad unconnected national networks, with almost every country essentially a separate market, only connected via a main trunk line, which is usually controlled by Russia and only flows in one direction.”

Poland is no exception. Over 30 billion m3 flows through it to Germany every year via the Yamal pipeline, according to Mr Chmal. One option to consider in case of a force majeure would be to reverse the flow, which is technically impossible at the moment.

The lack of interconnectors between markets has also been described by experts as a major obstacle to quick relief in case of a crisis.

But the problem is not only a technical one. Mr Chmal was unconvinced that the situation would be much different for Poland even with the right technology. Although it is not said openly, no one is willing to make any move that Gazprom could see as hostile, he explained.

Deal with the present

There are also steps that Poland could and should take at home. Today, one-third of Polish gas is produced internally. There is plenty more, but the current monopoly in the gas sector means there is a lack of incentive to search for it.

The country has a lot to do when it comes to drilling at home, according to Mr Szczęśniak. “In Poland there are a lot of reserves, but they are not used because of low competition in production,” he lamented. Indeed, he believes that the state monopoly on the sector should be dissolved, but said the government had no intention of doing so for now.

Despite this, state-owned companies regularly make headlines with new projects and storage facilities. But according to a source who wished to remain anonymous, many of these projects boil down to PR operations by state-owned energy companies wanting impress the government.

The Polish gas sector can’t pressure the goverment to behave in a more business-like fashion, said Mr Szczęśniak.

“PGNiG is state-owned – it’s a conflict of interest, and there is no question that the privatization process in the sector should be accelerated,” he added.

Shale drilling could be a game-changer but, according to most estimates, its true potential will not be apparent for another 10 years. Indeed, for Tomasz Chmal, there are still too many question marks.

“I would not make predictions. It’s like a lottery ticket,” he said.

So it all comes down to Russian gas. But Gazprom’s deputy CEO recently hinted that Poland and Europe’s reticence to comply with Russian conditions might have endangered supplies.

“The reliability of European gas supplies will be determined by competition with other global gas markets, primarily in Asia,” Alexander Medvedev said in an interview posted on his company’s website. “The [EU anti-monopoly] reform poses a real risk of underinvestment in the European gas industry.”

Is this a sign of problems to come or simply rhetorical posturing?

According to Mr Chmal, it’s closer to the latter. Although Gazprom might be unhappy with Europe, Asia doesn’t want to pay as much for gas, he said.

Thus Europe, Poland and Russia seem set to continue their uncomfortable partnership for the foreseeable future. Assuming there are no new problems in the pipeline.

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  Our Confederation partner – Warsaw Business Journal (WBJ) – take on the upcoming local elections, a key upcoming event in Poland. The article makes the argument that the local elections are more important than we may think, especially because of all the money that is involved in local government.
  
  
  
  

The business of politics
October 19, 2010 – Warsaw Business Journal

It's campaign time again. Over the weekend, the two major parties, the ruling Civic Platform (PO) and the opposition Law and Justice (PiS) held conventions heralding the start to their campaigns for the local-government elections due to be held in roughly a month's time.

Although they usually inspire less public excitement than parliamentary or presidential campaigns, local-government elections in Poland are actually more crucial to a political party's survival and well-being than the first two. 

While in parliamentary ballots no more than a few hundred candidates have a chance to go home smiling on election day, local-government elections involve tens of thousands of candidates from each party with thousands having a realistic chance of winning seats. 

Just to give a picture, this November, 107 city presidents will be elected along with 796 mayors, 1,576 municipality (gmina) executives and over 46,000 councillors.

Naturally, each of these positions means potential local government-related jobs for the party faithful and for the victorious politician's family and friends. The reality is that the amount of largesse a party is able to dole out after local government elections to a large extent determines the level at which it can keep its grassroots members satisfied and motivated. 

Thus, for the overwhelming majority of political party activists, this November's elections are indeed the most important in the political calendar.

A lot of money at stake

The outcome of this November's vote is particularly important as those elected now will be in charge of distributing the EU funds through 2013, when the current EU budget period expires. Poland is set to receive a net figure of over €60 billion in this period.

By all indications, the next EU budget will be nowhere near as generous as the current one, and thus the new local-government officials will have to get the most out of the funds Poland receives this time around.

The ministry of regional development states on its website that as of October 10 this year, it had signed contracts with beneficiaries for zł.193.5 billion (of which zł.135 billion will be “supplied” by the EU). 

This constitutes about 51.9 percent of the total allocation for the 2007-2013 period. Fair enough – but a signed contract is not the same as a completed highway or bridge. Some badly-needed infrastructure projects seem to take forever to get off the ground, even with funds already approved. This must be improved.

Also, the new local government officials would do well to make sure the number of “white elephant” projects built with EU funds are kept to a minimum (it would be naive to think they can be eliminated altogether) and that the rest of the money goes as far as it can in preparing Poland for 21st century capitalism. That will demand a highly skilled and innovative workforce, as well as top-notch infrastructure in order to attract investment and develop.

A battle for the capital?

It will be interesting to see how the presidential race in Warsaw plays out. Of the eight candidates, only two have a realistic shot at the job. Warsaw's current president Hanna Gronkiewicz-Waltz from PO and the independent candidate (though he is backed by PiS), Czesław Bielecki.

Most polls today show the current Warsaw president with over 50 percent support, meaning she could cruise to victory in the first round. But the campaign has just started and Mr Bielecki should not be ruled out or underestimated. 

He is in fact a very interesting candidate.

The life partner of Poland's most successful screenwriter, Ilona Łepkowska, Mr Bielecki was born in Warsaw to a family that was part of the intelligentsia and of Jewish background. He is an architect by profession but no newcomer to politics. He served as an advisor to Lech Wałęsa when he was president from 1990 to 1995 and was also an MP in the years 1997-2001. 

As an architect, he is best known for co-designing the headquarters of Polish public television, TVP, which earned him mixed reviews.

Mr Bielecki is known to be something of a maverick, but he is also a sharp intellectual. As an architect based in Warsaw, he has first-hand knowledge of the investments going on in the city, the tender processes for big projects as well as the bureaucratic obstacles that stand in the way of potential investors. 

Mr Bielecki says he can run Warsaw more efficiently than Ms Gronkiewicz-Waltz and can relieve the city residents of some of their biggest headaches, such as the ever-present traffic jams and the perennial lack of parking space, especially in the city center.

In an eventual debate, Mr Bielecki has what it takes to outshine Ms Gronkiewicz-Waltz. She is not the most eloquent of speakers, has a smile that often seems artificial, and isn't terribly photogenic.

Warsaw residents might however, not be in the mood to rock the boat right now as the city has indeed developed under Ms Gronkiewicz-Waltz, albeit slowly. And besides, she represents PO, which is decidedly the most popular party in the capital.

The presidency of Warsaw is certainly hers to lose.

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