Analysis: Investing in East Europe - I

By SAM VAKNIN, UPI Senior Business Correspondent

SKOPJE, Macedonia, Jan. 27 (UPI) -- Foreign Direct Investment in Lithuania is projected to have grown by at least 15 percent this year. Its FDI stock -- accumulated in its decade of independence -- reached about $4 billion, or about $1,000 per capita. The pace has picked up dramatically in the past four years in many second-tier investment destinations in Central and East Europe, including Slovakia, and formerly war-torn Macedonia and Armenia. Of the latter's $600 million in post-communist foreign inflows, two-thirds have been placed since 1999.

Prime investment locales, such as the Czech Republic, or Hungary, are still attracting enthusiastic fund managers, multinationals and bankers from all over the world. In a startling inversion of roles, Russia has become a net exporter of FDI. According to official figures -- which are thought to under-report the facts by half -- Russia invested abroad more than $3 billion every year since 2000. This is double the figure in 1999 and, netted against Russia's FDI inflow, translates into $300 million to $500 million in annual net outflows of foreign direct investment.


Moreover, the bulk of Russian capital spending abroad is directed at rich, industrialized countries. The republics of the former Soviet Union see very little of it, though Russian stakes there have been growing by 25 percent annually ever since the 1998 meltdown. Russia's energy behemoths compete, for instance, with Western mineral and oil extraction companies in Kazakhstan and Azerbaijan.

Levels of worldwide FDI declined by more than 50 percent -- to about $730 billion -- between 2000 and 2001. Yet, astoundingly, the major downturn in emerging markets FDI in the last three years has hitherto largely bypassed Eastern Europe. Net private capital flows -- both FDI and portfolio investment -- shot up six fold from $1 billion in 2000 to $6 billion a year later. Most of the surge occurred in the Balkans and the Commonwealth of Independent States.

According to the European Bank for Reconstruction and Development in its latest Transition Report Update, the region's economy grew by 4.3 percent in 2001 and by 3.3 percent last year. This is way more than most developed and emerging markets managed. Eight countries in Central and East Europe drew rating upgrades, only two (Moldova and Poland) were downgraded.

But all this may be changing. The global recession is already one of the most prolonged, trenchant and all pervasive in history. Its effect on the region's traditional export markets is pernicious.


Central and East Europe were spared the first phase of financial gloom which affected mainly mergers, acquisitions and initial public offerings. But now that multinationals are scrapping projects, scaling back overseas expansion and canceling long-planned investments, the countries in transition are bound to hurt.

According to the latest report by the Vienna Institute of Economic Studies, FDI flows to the countries of Central Europe were halved in the first quarter of last year, despite their looming membership in the European Union in May 2004. Export transactions were frequently delayed and privatizations attracted scant interest.

The Vienna Institute predicts a particularly bleak year for Poland and a Czech economy redeemed only by sales of state assets in the energy sector. Still, the statistics do not cover reinvested profits. These amount to $1.5 billion to $2 billion in Hungary alone -- equal to its average annual FDI.

The picture is mixed. Forecasts prepared in November 2002 by the U.N. Conference for Trade and Development showed marked declines in FDI in Moldova, Estonia, Hungary, Poland, Slovakia, Macedonia and Ukraine. Flows should rise in Albania, Bulgaria, the Czech Republic, Latvia, Lithuania and Slovenia, and remain unchanged in Bosnia and Herzegovina, Croatia, Romania and Russia, said UNCTAD.


Some countries fare better than others. Slovakia sold, last March, 49 percent of its gas transport company for $2.7 billion. Slovenia will book yet another record year in 2002 due to the long-deferred privatization of its banking sector and to the sale to foreign investors of assets originally privatized to cronies, insiders and communist-era managers. The Slovenian Business Weekly expects the country to have drawn in more than $600 million last year -- up 50 percent on 2001.

In the western Balkans, only Croatia stands out as an inviting and modernization-bent prospect. Yugoslavia is reawakening, too. It has privatized cement companies and rationalized the banking sector with a view to becoming a preferred FDI destination. In the first six months of 2002, it garnered $100 million in realized deals and another $60 million in commitments.

Romania and Bulgaria are laggards, though intermittent privatization in both countries is counterbalanced by cheap and skilled workforces in their growing and labor-intensive economies. Macedonia is reviewing, with a view to annulling, at least 30 suspect privatization deals. This will not endear it to -- anyhow reluctant -- multinationals.

Per capita, FDI stock is highest in the Czech Republic ($3,000), Estonia ($2,600) and Hungary ($2,400). These are followed by Slovenia ($2,000), Slovakia ($1,800), Croatia ($1,700) and Poland ($1,200). All, with the curious exception of Croatia, are slated to join the EU next year.


The total realized FDI in 2000-2002 in central Europe amounted to more than $50 billion, with Poland and the much smaller Czech Republic attracting the most ($14 billion each), followed by the Slovak Republic ($7 billion) and Hungary ($5 billion). The regional FDI stock comes to a respectable $100 billion.

Southeastern Europe (the politically correct name for the Balkans), excluding Greece and Turkey, attracted rather less -- about $12 billion in realized FDI since 2000. Croatia tops the list with $3.8 billion, followed by Romania ($3.3 billion), Bulgaria ($2.3 billion), Macedonia ($1.1 billion), Yugoslavia ($0.7 billion) and Albania and Bosnia-Herzegovina ($0.5 billion each).

Yet, the Balkans, impoverished and war-scarred as it is, accumulated a surprising $22 billion in FDI stock. According to the 2003 Investment Guide for Southeast Europe, published by the Bulgarian Industrial Forum, the share of FDI per GDP is much higher in the Balkans than it is, for example, in Russia. In 2001, the ratio was about 5 percent in Bulgaria, 7.5 percent in Croatia and about 12 percent in Macedonia.

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