Markets on the move in eastern Europe

Date: 07/12/00

By Bruce Barnard

EASTERN European businessmen trying to gauge when they are likely to enter the world's largest single market are keen observers of EU summits.

But this weekend's gathering of Union leaders in Nice, which will attempt to revamp the EU's decision-making procedures ahead of enlargement, will be a big yawn for corporate movers and shakers in the former Communist nations. Business is more interested in share prices, initial public offerings, privatisation and profit projections than tortuous and opaque negotiations on the Côte d'Azur.

Even the entry dates for countries hoping to join the Union, once a major topic of conversation in boardrooms and bars, no longer command much attention.

The deadline for the frontrunners may be sliding towards the second half of the decade, but the region has made solid progress since the first countries put in their membership applications. The economies of eastern Europe and the old Soviet Union are set to grow by 5% this year, their highest rate since the fall of the Berlin Wall, according to the European Bank for Reconstruction and Development.

That is a big turnaround from 2.5% growth in 1999 and a 1.1% decline in 1998, when Russia's financial crisis had an impact across the region. The region's economies are also likely to grow by 4% in 2001, compared with 3.5% in the euro zone.

Some individual performances stand out. The Organisation for Economic Cooperation and Development predicts Hungary's gross domestic product will grow by 5.5% in 2000 and 2001, well above the OECD average; unemployment has fallen to under 7%, well below the EU average; and inflation, which hit 20% in 1996, will fall to 8.5% in 2000 and 6% in 2001. At this rate, Hungary and a few other front-runners such as Estonia will pull ahead of Greece and Portugal well before they are allowed to join the Union.

The region is not counting on outsiders to fuel growth. Foreign direct investment (FDI) flows into central and eastern Europe increased for the third consecutive year reaching €26.45 billion in 1999, but this accounted for a paltry 3% of the global FDI flows, according to latest World Investment Report by the United Nations Conference on Trade and Development.

EU firms were the main investors, with services gaining over manufacturing. But the Union, which invested €586.5 billion abroad in 1999, or two-thirds of the global total, is more interested in the US and Asia than in emerging markets on its doorstep.

Still, the economies of the two Europes are meshing, with certain sectors such as automobiles already operating in a quasi single market - Volvo's Polish plant builds its buses for the whole of the continent - and others like banking and telecoms having substantial EU equity ownership. The Union also takes two thirds of the exports from eastern and central Europe.

Some eastern European economies have become more open than their western counterparts after ten years of reform and privatisation. The share of total bank assets controlled by foreign financial institutions has risen from under 10% in 1994 to more than 50% in 1999. Hungary, which was the first to sell off its state-owned banks, has the highest share of foreign ownership (57%) of banks in emerging economies, according to the International Monetary Fund's latest International Capital Markets report. Poland is third after Chile, followed by the Czech Republic.

Eastern Europe is also closing the 'new' economy gap with the West. The proportion of households with Internet connections in Slovenia and Slovakia equals the Spanish rate, while 39 out of every 100 Czechs will have a mobile phone by the end of the year - a rise of more than 100% over 1999, according to US consultancy Pyramid Research.

There is more competition in some sectors in eastern Europe than in the Union: Hungary, for example, has 14 providers of local telephony services and three mobile phone operators, although long distance and international services remain in the hands of the former state-owned monopoly Hungary Telecom.

The applicants continue to push ahead with market-opening measures. Estonia, for example, will completely open its national and international fixed-line telecoms markets to competition on 1 January, 2001, providing lessons for states which are still moving toward full competition.

Significantly, it will be a dogfight between foreign companies. The current monopoly fixed-line operator, Estonian Telephone Company, which is partially owned by Finland's Sonera and Sweden's Telia, will be pitted against Uninet Data Communications, which is controlled by Finland's Finnet International and OU Levicom Broadband, which is part owned by Sweden's NetCom.

While most of the EU's railways are trapped in the state sector, Estonia is preparing to sell its railroad to bidders which include RailEstonia, a consortium including US operators RailAmerica and CSX Corp. The group plans to establish an 11,000-kilometre freight line to China to transport Union-bound containers.

Western companies are still buying into the region: US Steel recently signed a final agreement to take over VSZ, Slovakia's largest steel producer, in which it will invest around €800 million over the next ten years. Smaller firms are stepping up investments, too: Finnish electronics manufacturer Elcoteq Network has plants in Estonia, Hungary, Poland and Russia and is expanding facilities in Estonia.

East European firms also are joining forces to keep pace with consolidation of their EU rivals. Poland and Hungary have begun talks aimed at forming an alliance of their national oil firms Mol and PKN Orlen which could lead to a share swap. Mol has already acquired a 36% stake in Slovakia's Slovnaft oil company, although talks with Croatia's INA over a possible equity swap collapsed earlier this year amid disagreement over valuations and control issues.

Foreign investors have become decidedly edgy in the past few weeks following an outbreak of messy disputes with governments in the region. Japan's Nomura Securities has claimed more than €880 million in compensation from the Czech state in a row linked to the fate of IPB, the country's biggest banking failure.

The Netherlands-based insurance group Eureko was mulling legal action in the EU against Poland's bid to overturn a 1999 privatisation agreement for PZU, the country's largest insurer, before a Warsaw court last week ruled in its favour.

Foreign energy companies, including Vattenfall of Sweden and TXU Europe, a unit of Texas Utilities, have walked away from the current privatisation of the Czech Republic's power-distribution and generating industry.

A French court seized more than 600 documents from Renault following a complaint by a US investment fund over its stake in Dacia, the Romanian car manufacturer which is 50% owned by the French firm.

Eastern Europe's transition to a market economy is an uneasy one, but it is working.

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