FT: Visegrad Four are Less Vulnerable to Crisis

A 'Special Report' on the Visegrad countries in Friday's Financial Times argues that the region is less vulnerable and may be in a better position to 'deal with problems' than many eurozone countries. Articles also touch upon the difficulty of moving from emerging to developed economy and the limitations of FDI-based development without an increase in R&D spending and improving education. Plus, everything you wanted to know about Czech viticulture...

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'Return Ticket to Dublin Please'

by Colm Kelly, Ireland (PERG blog guest author)

From my experiences working in two major Financial Institutions, which are primarily involved in the funds industry, I have noticed a rapidly growing number of vacancies are being filled by Central European Immigrants. The majority of whom come from Poland with the remainder hailing from countries like Hungary, Lithuania, Slovakia and the Czech Republic. From my view point there are three main factors in the influx of CEE workers:

Firstly, financial companies based in Ireland are made up largely of American and Japanese firms which enter the European markets at the place of least barriers. Ireland provided least barriers to entry approx. 15 years ago through substantial tax breaks/incentives and a highly educated and young workforce. This highly educated workforce is now also highly paid and such companies now seek other opportunities to minimise costs and first on the list is to relocate. Relocate where though? China? Too far removed from their market place. Australasia? Already possesses a fully developed financial services industry and wages will provide a huge problem. So what about Central Europe? Relatively low wages. Good infrastructure. Close to the target market and also possesses a very highly skilled and educated workforce. So what is the best way to kick-start the transition? Attract the target CEE workforce to your current location, allowing them to receive the perfect on the job training while preparing the company for a move to CEE.

This leads to the method of attraction, the second reason. My current employers, the global market leader, selected a target demographic and advertised heavily in local and national newspapers and also targeted university graduates. By offering good wages and helping with accommodation costs they attracted a large group of Polish recruits which were brought over to the Irish office and settled into the working environment with ease, largely due to their excellent grasp on the English language and because of their strong work ethic.

What lead to their easy integration into the Irish workforce was the third reason. The governments ’open door’ policy allowed the importation of EU8 workers without any restrictions or limitations. It was quite literally a ’help yourselves’ policy. Whereas other immigrants, Nigerians for example, had to apply for visa’s and re-entry visa’s anytime they’d like to return home for a holiday, the CEE workforce were free to come and go as they pleased without restriction.

Other factors which helped promote the influx include, word of mouth, a 100,000 strong Polish community which has fully integrated into Irish everyday life and the opportunity for CEE immigrants to enjoy a high standard of living with many opportunities to discover other European cities through quick and easy local airlines. As more and more Polish workers arrived and integrated into Irish life, word would spread back home and would also filter through other countries such as Lithuania. About 3 years after the initial influx of Polish workers, other nationalities started arriving in greater numbers. I now work in a newly acquired company which is made up of 50% CEE workers, all hailing in equal numbers from all of the above named countries. From many conversations with these workers, they all have common reasons for migrating to Ireland. The opportunity to earn a higher wage and save enough to return to their home countries with a sufficient nest-egg. The lifestyle played a major part in their choice of destination with a solid CEE base community now living and working in Dublin, many immigrants find it easy to settle into life over here.

So what does this mean for us Irish? Well in the eyes of our employers we have now become a highly educated but also highly overpaid workforce. While I have seen no restriction in the progression of immigrants up the corporate ladder, most have not been here long enough to have climbed very far so now is the ideal time for these foreign companies to relocate as wage ‘cut backs‘ in high positions are now possible. By chance, my company just happened to be building a new European base in Poland over the last 3 years which has just recently opened and a large portion of the Irish based work and Polish workforce have been redeployed to Krakow. The global recession has also timed itself perfectly to allow such a company to justify the move to its Irish hosts, who are among the worst hit by the credit crisis and housing market collapse. This is routine business strategy for a global player though and it was our turn to play our part as grateful hosts for ten or so years and to now accept our fate. Now I believe CEE states will play the very same role as we did and hopefully they will last longer than we did.

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Back to the Balkans. Volkswagen’s Relocation Plans and State-led Investment Promotion in Visegrad Countries.

By Michal Trnik, PERG guest author and MA IRES 2006 graduate

A recent news post concerning the alleged move of Volkswagen’s factory from Slovakia to Bosnia triumphantly lifted eyebrows of those who croaked the unstoppable and permanent eastward movement of foreign capital where the costs are irresistibly lower. According to these pessimistic prophets it was only a question of time when Central Europe cease to be interesting for foreign investors, which will result not only in its decreasing influx but also in direct relocations of multinationals’ production facilities.

The noticeable fuzz in Slovakia spurred by the announced VW’s plan to move whole production to Sarajevo was even magnified by citing no reasons for such a move. The ongoing silly season further boosted speculations on all fronts. Exorbitance of these catastrophic scenarios was refuted early on by Reuter’s refining follow-up, which confirmed only the relocation of small line that would have no direct impact on neither of VW’s two plants in Slovakia whether in terms of decreased production capacity or employment.

Panic is not justified. Not yet. Slovakia and other V4 countries in comparison to Bosnia still posses many FDI luring advantages. The decision of Europe’s biggest car manufacturer to start a new line of production in Bosnia rather than in Slovakia, however, sends a specific signal to Slovak government and other Central European countries as well. In particular, it serves as a good case for identifying persisting gaps in long-term investment promotion frameworks across the region.

Several speculative reasons why VW opted for Bosnia can be spelled out. Some argue that fundamental push factors that contributed to VW’s decision dwell in acute lack of skilled labor force, strengthening Slovak currency, sprawling anti-business rhetoric of current populist administration and end of tax holidays for the company. While others stress Bosnia’s pull factors such as incentives not subjected to strict EU limits, previous history of VW car production in Sarajevo and site’s potential to serve as testing grounds for further relocations.

Although none of the abovementioned reasons have to be directly responsible for the restart of VW’s production in the Balkans, they offer a larger picture concerning the state of current strategies to attract foreign investment in Slovakia and Central Europe. The Tatran Tiger’s economic success was largely generated by immense FDI inflows spurred by liberal reforms of Dzurinda’s governments. Most of investments came from at that time desired manufacturing industries, which helped to transform once economic laggard into the world’s biggest carmaker.

New challenges need fresh ideas. The V4 region soaked with manufacturing FDI demands new investment promotion approaches in order to move up the development ladder. Such strategy needs to be dynamic and has to reflect country’s development goals. In Slovakia, however, such scheme seems to be completely missing as can be seen on the country’s excessive and continuous reliance on automobile industry.

VW’s relocation to Bosnia certainly is not the first and will not be the last. Constantly rising wages in Slovakia and soaring world oil prices having detrimental effect on the car industry globally show obsolescence and fragility of country’s auto-industry focused investment promotion framework. Despite some indications of new winds blowing in minds of policymakers nothing like coherent, functioning and future-oriented investment promotion strategy was implemented. Although some minor diversification of FDI inflows into electronic industry occurred recently, Slovakia considerably lags behind in the amount of projects in high-tech, sophisticated services, IT or R&D. These require more brains than heavy machinery, can help transform the country into a modern service-based economy and make it less vulnerable to companies’ relocations. Slovakia’s close neighbors seemed to understand this some time ago.

The main regional leader in this respect is the Czech Republic, which continuously attracts sophisticated investments with high value added. The Hungarian investment strategy registered noticeable successes in form of highest FDI stock per capita in CEE and has a relatively better balanced structure as well. In fierce regional bidding wars for mega-investment projects, however, Hungary often does not hesitate to dig into taxpayers’ pockets in form of extra sweeteners offered to foreign investors. The case of Hankook Tire and speculations about Daimler’s recent investment are good examples of Hungarian generous aid to multinationals.

Daimler’s investment shows that V4 countries are still attractive for investors and can effectively compete with cheaper countries in the East even for large capital intensive investment projects. As Daimler is believed to be one of the last automobile investors in this region it is high time to rethink investment promotion strategy for those who did not do it yet. Czechs, Hungarians and even Poles did their homework on time and not only adjusted but also implemented their strategies oriented towards more perspective type of investments.

The age of massive capital and technology intensive manufacturing FDI inflows to the region is over. Forward looking investment promotion strategy is one of the necessary ingredients for further growth. Attracting investment in cutting edge technologies, services, R&D together with increased effectiveness of current production can become corner stone of its future economic success. Slovakia better learns this lesson quickly in order not to get caught unprepared face to face messages like that announced by VW.

August 28, 2008

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Europe’s greatest energy-secret hidden beneath the onions and garlic!

By Andrej Nosko

The natural gas field near the city of Makó, known for the garlic and onion farming, is considered to be one of the largest continental troughs in the world. If the initial estimates prove to be accurate, amount of the non-conventional gas found under the garlic and onion fields of Makó would mean it is the biggest onshore gas field since 1959 discovery of Groningen field in Netherlands. This would position Hungary as an important gas producer, potential exporter and would free Hungary altogether from its gas import dependence.

Makó in the recent news
Although the presence of the non-conventional gas in Hungary strictly speaking, is not such a novelty. The news reemerged when on March 31, 2008 USA, Texas based consultant RPS Scotia Group, published the Resource Estimates of the Makó trough, and in the begining of April MOL Nyrt, the largest acreage holder for unconventional plays in Hungary and the owner of a well-developed energy infrastructure in Hungary, announced results of its joint study with Exxon, noting great potential in the Makó area.

The following map has been compiled and redrawn from various illustrative images, included in the Falcon Oil and Gas Ltd. FORM 51-102F1 (Management Discussion and Analysis for the year ended December 31, 2007) and MOL April 14, Press release, to illustrate the contractual relationships in the Makó trough. The map is interactive, and annotated, feel free to click on the colored polygons, or open the larger map before reading further.


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Contractual relations in Makó trough
Although the largest acreage owner of the unconventional gas resources in Hungary is MOL, the news of Makó deposits was publicized mainly in connection with a series of announcement of joint deals between Canadian Falcon Oil and Gas Ltd., Hungarian MOL, and USA based ExxonMobil.

On April 10, 2008 the TXM Exploration and Production LLC, wholly owned subsidiary of Canadian British-Columbia based Falcon Oil and Gas Ltd. entered into a Production and Development Agreement with ExxonMobil Corporation affiliate Esso Exploration International Limited (acting in Hungary through its subsidiary ExxonMobil Kutatas es Termeles Magyarorszag Kft). On April 11, 2008, was this agreement followed by MOL and Exxon which signed an agreement to start a joint exploration work program in blocks 106 and 107 (see the map) in Makó Trough, as well as MOL's taking part on the Exxon's stake of the previous deal with Falcon. On May 16, MOL and ExxonMobil signed a Heads of Agreement to undertake a joint technical study of basins in Hungary with unconventional hydrocarbon potential.

Makó deposits in historical perspective
The predecessor of MOL, Hungarian state-owned oil company was exploring nonconventional gas deposits in Hungary (click for map overlay) already in 1960's and 1970's, and as WSJ quotes, geologist Dr. Gyorgy Szabó, currently a director at Falcon, who took part in the geological survey of the region in 1970s, Hungarian geologists "knew there were hydrocarbons there, but we also knew the rock was low-permeability and low-porosity." According to WSJ, in the late 1980s, the World Bank financed a deep-drilling program in Hungary, supervised by experts from the U.S. Geological Survey. The results of that review ended up in the hands of John Gustavson, founder of USA Boulder-Colorado based Gustavson Associates, who was touring former Warsaw Pact nations in 1991 on the lookout for oil and gas. In 1998 he acquired the license for a big chunk of Makó. Gustavon unsuccessfully tried to entice major oil companies into the project. Acording to WSJ he won interest of Marc Brunner, now CEO of Falcon Oil and Gas and, back than founding chairman of Ultra Petroleum, Pannonian Energy (which was in 2001 acquired by Gasco Energy of which Mr Brunner is currently a Chairman) and Pennaco Energy (Acquired by Marathon Oil), all companies with significant exprience in nonconventional gas exploration, notably in Wyoming.

Estimations of recoverable sources
Besides the news converage which is rather unreliable, since it does not provide citations, one can use two available reports for the 'preise' estimations. It is the September 2006 Independent Resource Assessment from The Scotia Group and March 2008 update to this report. The reports can be obtained throught search in the SEDAR database. The selected data from the reports is included in the following table (The comparison data is used from the BP Statistical Review of World Energy 2008):


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This table summarizes the probabilistic summation of the recoverable resource estimates, nonetheless, this is only the technical probability of the project, and the certainty of the exploration still varies significantly. According to various sources, time to go online for the Makó gas varies from late 2008 to 2012 or to even later dates. Nonetheless, the news of the Makó deposits is very interesting and important, and although the nonconventional resources are not the cheapests there are, with the prices of gas predicted to rise substantially for Europe, even the nonconventional gas resources will prove indispensable and affordable.

If the predictions of Alexei Miller, Gazprom CEO, of gas prices rising to $500 per 1,000 cubic metres from the current $400 by the end of 2008 - or even $1,000, should the oil prices hit $250 per barrel - prove accurate, Makó's Hungaricum will not be onions and garlic, but natural gas and, a new landscape populated by hundreds of gas drill rigs.

Link to photo gallery of drills (added on November 19, 2008)

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