Czechs successfully diversify outside the Eurozone

Earlier this year, the government of Czech Prime Minister Petr Nečas announced it would support a diversification of Czech exports to decrease the heavy reliance of the Czech Republic on the troubled eurozone. Last month, Nečas added emphasis to these efforts when he criticised what he called irresponsible campaigns to promote dubious human rights causes which potentially hurt Czech exports.

Foto: Creative Commons/ Karl&Ellen

The remarks were part of a speech at the Brno Engineering Fair, the traditional event that showcases Czech industry. While the statement drew fire from many quarters, not least of all from Karel Schwarzenberg, Nečas’ foreign minister, it probably did reassure many Czech businesses, which are indeed increasingly active in markets east of the eurozone.

The government supports exports through three bodies. General information and business-to-business linkages are provided by the eponymous Czech Trade, which is the trade counterpart to the better known Czech Invest (charged with the task of bringing in foreign direct investment). More important are two other agencies, the Czech Export Bank and the Export Guaranty and Insurance Company (EGAP). These are relatively powerful, well-funded institutions through which the government can steer trade and investment.

And in fact, in both trade and investment, the Czech Republic is beginning to punch above its weight, at least in the context of the new EU member states and even its relatively well-developed post-communist neighbours, the V4 countries.

Headed East

This can be illustrated by the behaviour of Czech companies in three countries where the biggest deals have been scored in the past twelve months – Russia, Pakistan and Bulgaria.

First, Czechs seem to be successfully retaking their traditional market, Russia. When the then-President of the Russian Federation Dmitry Medvedev visited Prague last December, he was accompanied by a strong trade delegation. Deals worth 50 billion Czech crowns (about €2 billion) were signed, including a contract to build a 400-kilometre stretch of railway in the Urals region.

Secondly, investments in Pakistan testify that Czech companies seem to be successfully penetrating new markets. In August, the Vitkovice Machinery Group signed a memorandum of understanding for a project worth 6 billion Czech crowns (€270 million) to build a steelworks in Pakistan. At about the same time, Prague-based Wikov Group concluded a deal to develop a wind power plant in the same country. Both are daring projects in relatively uncharted and risky territory. And while Vitkovice is a traditional industrial powerhouse, Wikow is a relatively new, small player. This illustrates another interesting fact: Czech exports and investments are not exclusively driven by large, traditional players.

Thirdly, in June a privately held company from Moravia called EnergoPro bought the Bulgarian distribution grid of the German energy giant E.On. This was a surprise move, since EnergoPro is hardly a household name. However, industry insiders are quite familiar with the company.

EnergoPro, which operates 15 hydroelectric plants in the Czech Republic, has been quietly building a portfolio of projects in a string of emerging market economies. Before it branched out into distribution, it operated 8 Bulgarian hydroelectric plants, and it has a presence in Turkey (5 plants), Armenia (one power plant project in development) and Georgia. In Georgia, the company operates 15 hydroelectric power plants and controls power distribution in about 70% of the country. Thanks to this and some smaller investments in mechanical engineering (INEKON), the Czech Republic is the biggest foreign investor in Georgia.

In Bulgaria, EnergoPro is not the only significant Czech presence here. The Czech energy giant ČEZ, which also operates plants and distribution networks in Romania and Albania, owns most of the country non-nuclear power generation units and operates the second biggest power distribution networks, covering the west of the country, including the capital Sofia. The Bulgarian government plans to sell off its minority 33% stake in November. EnergoPro covers the northeast, including Bulgaria’s second city Varna, while the third investor, Austrian EVN, covers the sparsely populated and mountainous South East of the country. Thus, most of Bulgaria’s electricity is now distributed by two Czech companies.

Czech companies are present in other sectors of the Bulgarian economy. Probably the most significant of these investments is Hemus. One of the largest office-supply makers in southeast Europe is owned by the south Bohemian Koh-i-noor Holding, which controls Koh-i-noor, the pencil maker, the liquid gas distributor Kralupol (previously Vitogaz) and the mechanical engineering firm Ponas. Under Koh-i-noor, Hemus will soon branch out into electronic measuring devices.

Exporter of capital

During most of their economic transition, the V4 countries have been importers of capital. This is changing. Hungarian outward investment is traditionally led by their multinationals with an international shareholder base, such as the oil company MOL or the bank OTP. This is similar in the case of Poland where the state-controlled energy company PKN Orlen leads the volume of Polish foreign direct investment. And in the case of Slovakia, few companies have ventured to make significant investments abroad. The biggest investors are two private equity firms, J&T and Penta. These, however, are mostly active in the near abroad, in the Czech Republic and Poland.

In contrast, Czechs have been casting their nets far and wide. In terms of economic strategy, this makes perfect sense. Diversification is healthy. A large part of Russian capital stock is at the end of its lifecycle and a strong drive to help replace it via engineering exports is logical. Similarly, Bulgaria is a good focus point for the region (Romania and the EU hopeful Balkan countries) which, being relatively poor, has the potential for fast growth driven by the convergence effect. Pakistan is perhaps more of a gamble, but with well-structured contracts ultimately guaranteed by the Pakistani government (or, in the case of Wikow, the government of the Sindh province), risks can be controlled.

The new trade and investment drive is not without controversy. As the flak that Nečas drew with his comments shows, not everybody is happy with the notion that the Czechs should tone down their traditionally activist stance on a range of political issues.

The situation is all the more delicate since part of this success story is the traditionally strong support Czech businesses have in their diplomatic service. Political infighting led by cabinet-level officials might not entirely scupper trade and investment deals, but could create disruptions when transmission channels between the diplomatic service and the financing agencies don’t work properly, for example.

Nevertheless, for the moment it looks like the Czech Republic has found a workable strategy to cover at least some of its risks as a neighbour of the ailing eurozone.

Stela Pencheva

Stela Pencheva

holds a B.A. degree in Psychology from University of Maryland and a Master's degree in Human Resources from Webster University. She has an extensive experience in international commerce and investments,dealing mostly with dynamic and unstable markets such as Bulgaria,Romania,Ukraine and the Czech Republic.