Has the Turnaround to Russia Been Good for the Czech Economy?

For all those who had staked their future— be it political or economic—on cooperation with Russia, the second half of 2014 was a time of heart-searching. This was initially sparked off by the outbreak of fighting in the east of Ukraine and later by the imposition of sanctions on Russia by Europe and the US, followed by Russia’s counter-sanctions. Towards the end of the year these unfavorable developments were further exacerbated by the plummeting price of oil and the ruble crisis.

This has put the Czech Republic in a rather difficult position, particularly since recent statements by the Czech president had already given the country a political reputation among European states as being something of a lobbyist for Russia. These problems were amplified by the actual nature of the economic cooperation between the two countries: since the 2008–2009 economic crisis, the focus of the Czech economy had been increasingly shifting to Eastern markets, including Russia. This was because after the fall of Communism and especially since the mid-1990s the Czech Republic, along with other Central European countries, had promoted cooperation with eurozone countries that were particularly hard hit by the crisis.

Another reason for the strengthening of economic ties with Russia, many of which were rooted in the days of Communism and have remained intact ever since, is the fact that the goods produced and services offered by many Czech companies have no chance of succeeding outside the Russian (Eastern) market. One such example is the state airlines ČSA.

A further factor that has contributed to the increased focus on Russia is the PPF investment group run by the wealthiest Czech, Petr Kellner. As the firm’s cooperation with Russia intensified, other companies followed suit. I remember talking to an architect who, after the 1968 invasion, had vowed never to go to Russia again. But an offer to take part in PPF’s Russian operations made him change his mind.

Until German Chancellor Angela Merkel proclaimed the superiority of fundamental international law over trade last year, a further argument that was difficult to counter was the extent of business interests German and other Western companies had pursued in Russia. The temptation of the Russian market outweighed the risks involved.

However, particularly during the second half of 2014, this became unsustainable for many companies due to growing pressure on Western partners and the introduction of sanctions. This raises the question as to whether the Czech economy’s sharp pivot to Russia was a mistake.

Statistics provide part of the answer. Following its accession to the EU the Czech Republic shifted its interest away from Russia somewhat, yet by 2009 Moscow was Prague’s fifth largest trade partner. Between 2009 and 2013 Czech exports to Russia increased by 250%. In 2014 the share of imports comprised 5.5% and the share of exports 3.7%.

However, the growth of mutual trading began to stagnate in 2013, and last year it began to decrease slightly even before European sanctions over Ukraine kicked in. This is a key factor, albeit one that the proponents of close cooperation with Russia tend to ignore.

The sanctions provided the conversation with a new dynamic. The arguments in the Czech discussion reflect those heard throughout Europe: that imposing sanctions on Russia would harm local factories which, in turn, would result in the loss of jobs and trade opportunities. However, a European Commission study at the end of 2014 demonstrated that the impact of sanctions and counter-sanctions on Czech economy was much less significant than what had been assumed. The growth of GDP was likely to slow by 0.2 percentage points in 2014 and by 0.4 percentage points in 2015. The study estimated that some 1000 jobs may be at risk. For example, Czech farmers might lose around CZK 300 million as a result of Russia’s counter-sanctions, whereas their Polish colleagues are likely to incur much larger losses, in the region of CZK 13.5 billion at the current exchange rate.

As for the potential ramifications of the state of Russian economy for the Czech Republic, the country is not considerably better or worse off than other EU member states. Big players such as PPF play a significant background role since their consumer loans business will undoubtedly be affected by the stagnation of the Russian economy. However, in terms of jobs the politicians’ main argument is the engineering industry and other manufacturing firms—or the skilful Russian propaganda.

Another element of the turnaround to Russia concerns new components for Czech nuclear power stations. Russian companies that would like to be involved in their construction have already bought up traditional Czech firms. However, the tender for two new units at the Temelín nuclear power station has been postponed for the time being and the leverage of these firms seems to be rather limited precisely because they are Russianowned. In the neighboring Poland, for example, local politicians and bosses of state companies involved in the planned construction of the first Polish nuclear power plant have made it clear that Russian firms—and thus also their Czech daughter companies—basically have no chance of taking part in the project.

Therefore, seen through 2015 optics, the pivot to Russia does not appear to have been particularly beneficial to the Czech economy although, in this respect, the Czechs are not much different from the rest of Europe. An extreme case is Hungary’s Prime Minister Viktor Orbán whose economic policy— partly due to the 2008 and 2009 crisis—included far-reaching plans for expanding into new markets, grandly referred to as “the policy of opening to the East.” Now all that is left are cooperation contracts with Russia, which include, among other things, a loan to Budapest for the construction of two new units of the Paks nuclear power station.

Other industrial European nations also regarded Russia as a potentially very worthwhile partner, especially during the crisis. A notable example is the controversial French sale of two Mistral amphibious assault ships, and numerous German and Dutch business interests in Russia.

The political developments of 2014 took everyone by surprise. Russia’s role in Ukraine and the way she has treated foreign investors have confirmed what proponents of cooperation with Russia had long refused—and many still refuse—to admit: that the risk involved in this kind of cooperation is becoming disproportionately high.

The dramatic slump in the exchange rate of the ruble at the end of 2014 has vindicated financial markets which, unlike many politicians, have taken a more rational view of the situation in Russia.

While the European Union was in the throes of crisis, an economic pivot to Russia seemed quite rational and logical. In the wake of 2014, however, it makes sense only to those who are risk-takers or have a specific reason to take on excessive risk.