BEYOND THE CURTAIN
What is it like to do business in Central and Eastern Europe 25 years after the fall of communism? We sum up the opportunities and challenges for foreign investors.
When the Berlin Wall fell 25 years ago, few companies would have ventured beyond the newly-opened Iron Curtain. Today, however, there is a real opportunity to work with and export to the fast-growing former Soviet satellites in Central and Eastern Europe (CEE) and Russia itself.
Bar the latter, all these countries are now members of the EU. Most have experienced a swift recovery from the financial crisis or, like Poland, remained virtually untouched by it. Their economies are at different stages of development, but all offer long-term growth prospects. There are supply chain opportunities in strategically important industries and EU-funded infrastructure projects worth €226bn in 2014-2020.
Cost pressures in Western Europe, especially in the automotive and services sectors, promote outsourcing and near-shoring to the CEE region, too. At the same time, average wages in these countries are a very competitive 50-75% below the Western European average.
- THE BALTICS
In the World Bank’s Doing Business 2014 report, Estonia, Latvia and Lithuania rank 22nd, 24th and 17th respectively. It is easier to do business in Lithuania than in Germany (ranked 21st).
Currency: Euro in Estonia and Latvia, litas in Lithuania. There is a high probability Lithuania will join the eurozone in 2015.
GDP per capita: €13.800 (Estonia), €11.548 (Latvia), €11.650 (Lithuania).
Workforce: The Baltic States have developed high-potential, specialised clusters of economic activity. Today, many companies provide innovative products and services in sectors such as biotechnology and health, environmental technologies, mechanical engineering, aeronautics and space technologies, agro-industry as well as logistics.
Challenges: SEB’s Eastern European outlook report predicts all three economies will be squeezed by the fallout from the Russia/Ukraine crisis and slower Russian growth.
A ranking of 42 in Bloomberg’s Best Countries for Business in 2014 has Bulgaria batting with the big players in the top 50 countries worldwide. In 2013, it had one of the lowest budget deficits in the EU (0.8%).
Currency: Bulgarian lev (BGN). The Euro is not likely to be adopted for several years.
GDP per capita: €5.486
Workforce: The minimum wage is €174. According to Eurostat, almost half of the population lives below the poverty line.
Challenges: The health of Bulgaria’s banks came into the spotlight in June, when the country’s central bank took over Corporate Commercial Bank, Bulgaria’s fourth-largest lender, following runs on deposits at this and another lender. The European Commission extended a credit line of €1.4bn to help the banks.
Events in Ukraine mean that some investors who would typically invest in Ukraine or Russia are now turning their focus on Croatia and other countries within the region. Croatia represents the shortest and the fastest route between Western Europe and Asia. It has the highest internet penetration in south-east Europe. The country has recently introduced a new form of limited liability Company with a lower minimum capital requirement and simplified incorporation procedures.
Currency: Croatian Kuna. Croatia is cautious about adopting the euro.
GDP per capita: €10.163
Workforce: The unemployment rate in Croatia hovers around 18%.
Challenges: The Croatian government is putting a lot of effort into regaining credibility with investors, which has been lost over the last 15 years. Corruption hasn’t disappeared, but it’s now at a lower level than ever before.
- CZECH REPUBLIC
The Czech Republic has emerged as one of the most stable and business-friendly of the post-communist states in Central Eastern Europe. Its geographical position at the heart of Europe is a huge strategic advantage. The Czech Republic hosts the manufacturing subsidiaries of nearly 1,200 foreign companies, including ABB, Continental, Daewoo, Danone, Ford, Nestle, Phillip Morris.
Currency: Czech Koruna. After being regarded with suspicion for 10 years, euro adoption is now on the Czech government’s agenda.
GDP per capita: €14.206
Workforce: Czechs are highly educated, with relevant business and technology skills. About one third of students study economics, finance or IT.
Challenges: Corruption is perceived as an important obstacle for business, together with an unstable and inefficient public administration.
It is getting harder to do business in Hungary. It ranks 40th out of 82 countries worldwide, and eighth out of 16in Eastern Europe, according to the Economic intelligence Unit’s Business Environment Index, compared to 35th and fifth in 2013. Hungary’s high taxes and increased concerns over the Government’s policy towards foreign investors are the biggest barriers to business.
Currency: Hungarian forint
GDP per capita: €9.898
Workforce: Hungarians need to improve the skills of their labour force. At present, however, training opportunities in the country are not sufficient.
Challenges: Investors can encounter bureaucracy, corruption, language difficulties and legal barriers at public procurement.
The EU’s largest eastern economy and, according to Bloomberg, the best country to do business within Eastern Europe because of its expanding consumer market and improving infrastructure. The only economy in the EU to dodge recession. Of the €226bn EU funds allocated to CEE in 2014-2020, the highest budget €82.5bn has been allocated here. Aided by EU funds, Poland has spent more than €62bn to revamp roads and bridges in the last six years.
Currency: Polish zloty. Like several other CEE countries, Poland is in no rush to join the euro.
GDP per capita: €10.113
Workforce: Trade unions occupy a special place in Polish hearts because of the role Solidarity played during the upheaval of the 1980s. Today, however, only 12% of employees belong to a trade union.
Challenges: The business climate in Poland is improving rapidly but there are still some problems surrounding red tape and tax transparency, and the Polish judicial system can work at a snail’s pace.
The bad news is the cost of doing business in Romania is high-at number 73, Romania’s lagging behind most of its EU partners in the World Bank’s Cost of Doing Business ranking. The good news is that costs are decreasing and the potential rewards are very high. Romania has made paying taxes easier and less costly by reducing the payment frequency for company tax from quarterly to twice-yearly and by reducing the vehicle tax rate. Enforcing contracts is now easier, too.
Currency: Romanian leu.
GDP per capita: €7.121
Workforce: According to Eurostat, 40% of Romanians live below the poverty line. The minimum wage is €191.
Challenges: Romania scores really badly on dealing with construction permits.
The IMF expects Russia to grow by only 0.2% this year and warns the country is effectively already in recession. The successive rounds of Ukraine-related sanctions are starting to bite. Foreign banks are reluctant to lend to Russian companies, rising interest rates make debt more expensive, and grocery prices are on the up after Putin’s retaliatory ban on Western food imports. However, we’re unlikely to see a financial crisis in Russia in the short and medium-term as Russia has enough reserves to support its financial system for some time. Russia should overtake Germany as Europe’s largest automotive market in 2015, according to UKTI.
Currency: Russian ruble
GDP per capita: €14.949
Workforce: Russia’s workforce is shrinking. Because of the current demographics, the Federal Migration Service estimates the country will lose 10 million workers (out of approximately 70 million) by 2025.
Challenges: Other than the sanctions, pay attention to the ever-changing Russian tax.
Companies looking to export internationally might think twice about expanding into Slovakia. The bureaucracy is dense. However, with few exceptions, foreign companies establishing Slovakia-based subsidiaries generally encounter no special requirements on directors and shareholders. And Slovakia has grown to become one of the leading car producers in the world, thanks to VW, Peugeot, Citroen and Kia Motors.
GDP per capita: €13.333
Workforce: Of the four Visegrad Group countries (Slovakia, Czech Republic, Hungary and Poland), Slovakia boast the highest labour productivity.
Challenges: According to TMF Group, obtaining a construction permit can take 286 days, getting a new business connected with the electricity grid 158 days, and enforcing contracts 545 days.
The Slovenian economy is still in recession, although 0.7% growth is forecast for 2015. There are big business already operating in Slovenia including Unilever, AstraZeneca, Shell and Castrol.
GDP per capita: €17.140
Workforce: Average gross monthly wage is about €1.500
Challenges: Public administration reforms have transformed the old bureaucratic system into a people-friendly system. Nevertheless, certain bottlenecks still exist. It is a price-sensitive market, where products and services need to be competitive. The high tax load on labour means much of companies’ gross income is eroded by taxes and social contributions.
Global Consultants can assist you to establish an efficient international business structure for direct business investments in these countries in order to maximize your rewards and protect your assets.