It has been 32 years since the transition began in post-communist countries. This peaceful uprising led by Poland in 1989, ended after two years when Mikhail Gorbachev acknowledged the unification of West and East Germany. Despite this transformation, however, there’s still a large discrepancy between Eastern and Western Europe. This is especially apparent in the investment sector, where investors are either hesitant to get involved or are entirely unaware of the exciting opportunities that exist within this emerging market. The reason behind this is quite obvious: 50 years of communism, “wild east” stories of corruption years after the demolition of the iron curtain have imprinted a pejorative image of Eastern Europe. Yet, many private investors, the IMF and the EU have taken a leap of faith, and according to a study made by Skanska, the overall economic growth in the Central and Eastern European (CEE) region since 1990 totals a staggering 270%. This growth is linked to investments made by Western contributors and billions of Euros invested have allowed CEE members to reinvent themselves and become part of the global network. Here’s everything you need to know about emerging market investment in Eastern Europe.
A brief history of the Eastern European market
The 90s were troublesome for most and fortunes based on ex-state-owned property emerged from thin air – a majority of them built by former regime apparatchiks with connections and intel. Many state-owned gems like steel factories, automotive holdings and agricultural enterprises were in terrible shape when the real economy hit the streets. Huge infrastructures with thousands of redundant workers were cut off from supplies, power and financing within days. The products produced in these companies were outdated, of bad quality and with the open borders, everybody preferred to purchase Western goods, treating once-loved local brands with complete disrespect. In some countries, different forms of privatisation took place – in countries like Hungary, Czech Republic, Slovakia, Slovenia and Poland, the majority of once state-owned industries were sold to the highest bidder. Two examples are the famous Polish Wedel chocolate brand that was sold to PepsiCo and Goplana brand sold to Nestle, both in the early 1990s. In countries like Ukraine however, privatisation took a completely different path. Most of the precious industries were taken over by former government officers who became self-proclaimed businessmen. These people today are associated with the so-called oligarchs and rule in post-soviet countries together with people in power.
Throughout the whole region, global market players knocked on the doors of abandoned, formerly-privatised factories, bringing know-how and employment. Most of the local brands were taken over by large western brands like Milka, Nestle, Coca-Cola, Ariel, Calgon. At first, locals loved this sweet new wave of the ‘American Dream’ opening its doors in our own yards, but after a few years, locals began to see the great potential in the old brands. These have since been revived and compete quite successfully with their older brothers. A great example of this is the Czech chocolate brand ORION. Taken over by Nestle 30 years ago, the Swiss management quickly understood how strong local brands were in the minds of consumers and rejuvenated the brand, adding new products to the portfolio.
In the end, it took more than a decade to stabilise local economies, and a horrifying war in former Yugoslavia to settle ancient religious and ethnic animosities. The real wave of change came in the early 2000s, with the accession of most of the CEE block to the EU. Becoming part of the EU family was a real game-changer – it gave Eastern Europeans financial stability and entering NATO offered safety and independence from Russia.
Advances in technology
Technology within the Eastern European market has been adopted incredibly quickly – the era of DOS, fax machines and cheque books were short as was its structural depth, and since its shutdown, it’s been long forgotten. Most post-communist countries enjoy mobile banking and LTE and 5G solutions operating at their peak. In Poland, e-banking was introduced in 2000, GSM was introduced in the Czech Republic in 1996 by Eurotel (now O2) and Paegas (now T-Mobile) and Telia Lietuva – the Lithuanian mobile operator who entered the market in 1995 – already started to test 5G technology in 2018.
The introduction of the EU and the effect on emerging market investment
With the millennium came the accession to the European Union. This gave an amazing boost, not only in terms of financial stability and growth but also in terms of trust, structure and a sense of unity with the West. Highways, pavements, bridges, tunnels and infrastructure, including sports facilities, hospitals, subways, buses and trams were built with EU support, which has dramatically changed the landscape of countries like Poland, the Czech Republic, Slovakia, Romania and Hungary. Additional financial aids came in, such as the Norwegian Fund or Swiss Economic aid, helping SMEs and local governments speed up economic growth. Proof of this growth can be seen in Poland. In 1989, Poland’s GDP per capita was 1 731 USD, today it is around 15 653 USD per capita – that is 9 times higher. But, when talking to CEE citizens about what they like most about being part of the EU community, three main benefits top the list. Peace and security – Europe has never experienced such a long run of peace; free trade and hassle-free travel; and lastly, healthy food and high environmental standards.
We need to remember that the EU consists of 500-million citizens, 27 countries and covers 23% of the global GDP – making this a huge, decentralized market. This is a great prerequisite to forming the United States of Europe in the future.
Changes in the legal system
The legal environment also evolved in the last 30 years – the vast majority of the former eastern block comprises constitutional governments with civil law in force. Before the freedom changes, the majority of the constitutions in the former communist block were written under the full supervision of the USSR (communist Russia). On top of this so-called democratic government was the First Secretary who was the leader of the ruling party, which was usually a conglomerate of Labour and Agricultural Party members. The entire legislative system was writing laws in favour of the party and judges, especially those working on political cases had no independence and were taking orders from the ‘Politburo” – the leaders of the regimes. In extreme cases, like in Romania, the government turned into a one-man dictatorship with Nicolae Ceausescu ruling like a king for more than 24 years. But like most dictators he was dethroned by his own people, having been sentenced to death and shot in December 1989.
The legislative systems, due to their impractical structure or outdated paragraphs have been reworked to cope with the needs and expectations of both individuals and private businesses. Something non-existent during the communist era. Laws like trademark and copyright policies were introduced to secure investments done by corporations and local businesses, land and real estate changing hands required laws to protect one’s property, which had to be fully in line with Western standards. For example, the Polish Civil and Trade Law Acts are based on the German legislative rules, which were copy-pasted with some minor local changes.
Bridging the gap between the East and the West
There is, however, still the partition between East and West when talking about Europe. In countries such as Poland, Czech Republic, Slovakia and Hungary people would refer to Germany, the UK and France as “the West”. The magical West, which is wealthy, secure and clean, where there is no poverty and everybody has a decent job that allows them to buy a house and a Mercedes. This cliché obviously is completely wrong – Eastern European highways are brand new and immaculate, with modern and clean infrastructure, downtown areas of many former communist cities look better than their Western counterparts. On top of this, there is still a sense of urgency to make things happen. In 2012, just before the EURO Football Championship hosted by Poland and Ukraine, an Austrian journalist Michael Laczynski working for the known title “Die Presse” came to Warsaw to investigate the hype around CEE – and Poland in particular. What he found after interviewing Polish entrepreneurs and other successful people, is that the Poles have a philosophy to be: “punctual like the Germans, to enjoy life like the French and be as daring as the Ukrainian Cossacks.” A triad of uncompromised virtues, wouldn’t you say?
Eastern Europe is still a very tempting location for anyone, even more so for those with a keen interest in emerging market investment. Even though times when one could deposit cash in local banks and expect 10-15% interest rates are over, real estate, new tech investments will give one two figure returns per annum due to the emerging character of these markets. Economies are stable, the legal environment is safe and though the judiciary systems are slow and somewhat less competent, especially when faced with high tech solutions where the law has no ground, investing in the Eastern Europe market makes perfect sense.
After 30 years of growth, the past is now history, especially for the younger generation. Their understanding of communist times is as clear as the 2nd World War is for most of us – we know it happened and we know why we should prevent it from happening again – but there is no regret, just sheer pride in what the country has achieved and what it stands for today. The right-wing political uprisings are unsustainable long term and probably will lead to more centric-based solutions. Regardless, business is as usual, because business means taxation and taxation means growth. For those looking for interesting avenues to explore, Eastern Europe is a great example of how exciting emerging market investment can be.