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After World War II, Czechoslovakia fell within the Soviet sphere of influence. In 1968, an invasion by Warsaw Pact troops ended the efforts of the country's leaders to liberalize party rule and create "socialism with a human face." Anti-Soviet demonstrations the following year ushered in a period of harsh repression. With the collapse of Soviet authority in 1989, Czechoslovakia regained its freedom through a peaceful "Velvet Revolution." On 1 January 1993, the country underwent a "velvet divorce" into its two national components, the Czech Republic and Slovakia. Now a member of NATO, the Czech Republic has moved toward integration in world markets, a development that poses both opportunities and risks. 

Update No: 075 - (28/07/03)

Political gridlock
The political situation in the Czech Republic remains highly uncertain. The government is hanging on by a thread. Premier Vladimir Spidla is leading a coalition government under the control of his Social Democratic Party, which has barely survived several parliamentary crises of confidence.
After just scraping a majority in parliament after election last year, Spidla was unable to prevent the election to the presidency of Vaclav Klaus, a long-time conservative leader and an opponent of the Social Democrats. Klaus is clearly manoeuvring to have a new government of more right-wing forces, more in tune with his ideas. Which at one time were regarded as Thatcherite. But which sustained 'nomenclature' corruption for too long after the disappearance of communism from Czech politics. 
Spidla is under terrific pressure from the IMF to reduce the budget deficit by curbing public spending. Defence has been targeted for cuts, in defiance of new NATO membership, provoking the resignation of the defence minister, Jaroslav Tvrdik, Deputy Premier, Peter Mares, might also leave and Research and Development (R & D) cuts are being brought forward. Recently he stated that he now thought R and D spending would be sustained and that he "would stay in the government."

Economy slows down
The International Monetary Fund has cut its estimate for Czech GDP growth for 2003 from 3.2 per cent to less than 2 per cent according to its latest report on the Czech Republic. "Assuming a fairly strong rebound in Western European demand, we expect GDP growth to be slightly below 2 per cent in 2003, rising to about 3 per cent in 2004," the IMF report said.
The Fund considers private consumption boosted by rising incomes, bank loans to households and exports to be the foundation of Czech growth. The organisation expects the current account deficit to remain in a range of 5-6 per cent of GDP, financed mainly by foreign direct investment. The IMF also expects some increase in private investment growth though it adds that it is likely to "remain subdued pending greater clarity on prospects for export markets." The biggest risks to growth concern the possible substantial delay in Western Europe's economic recovery, the IMF warned. The Fund described the downside risks to growth as "significant." The IMF is more optimistic on the country's medium-term prospects. That optimism, however, is conditional upon the political will to "deliver fiscal consolidation and institutional reform," the report said.
Assuming reasonable progress in these areas, the organisation foresees potential growth of 3.5-4 per cent over the medium term.
The IMF's forecast is among the more pessimistic for the Czech economy. The Czech Finance Ministry estimates this year's GDP growth at 2.3 per cent while the Czech National Bank puts it at 2.3-2.9 per cent. 

Rapprochement with the Germans
Spidla must know that his days are numbered. He wants to go down on the record for one historical achievement.
The Czech Republic has accepted moral responsibility for the expulsion of about three million ethnic Germans from their homeland in the Sudeten area after World War II. "We regret that these events and actions happened," said Spidla during a conference at Goettweig in Lower Austria. Only recently had the government in Prague, for the first time, distanced itself from the expulsion of the Sudeten Germans, who have remained a close-knit cultural group in Germany since 1945.
The Czech government was also expected to decide on a "humanitarian gesture" and set up a commission taxed with investigating ways to alleviate "individual injustice" against Sudeten Germans, according to a confidential government paper.
Spidla recently stated that the Czech Republic had been slow in facing "the dark sides of its own past." The Benes decrees and 1946 law would not be affected by Prague's gesture, Spidla said, referring to the decrees issued by Czechoslovak president Edward Benes in exile during the war and passed as law in 1946. 
The decrees, which dispossessed the Sudeten Germans of their land and citizenship, last year triggered a row between the Czech Republic and Germany in the run-up to Prague's entry to the European Union. Prague fears that Sudeten Germans could claim compensation if the decrees are scrapped, whilst an angry German Chancellor Gerhard Schroeder cancelled a state visit in 2002 after Spidla' predecessor, Milos Zeman, called the Sudeten Germans "Hitler's Fifth Column." Spidla said his country's regret included the German-speaking people of Bohemia who became Austrian after the war. Meanwhile, Czech Deputy Prime Minister, Peter Mares, also acknowledged that the debate on the countries' shared history and future was increasing. However, he warned the conciliatory gesture of one side could be answered by demands from the other side. 

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Russian rocket puts Czech research satellite into orbit

One of the nine satellites onboard the Rokot rocket carrier [booster] has been put into orbit, Russian Space Troops spokesman Vyacheslav Davidenko told Interfax News Agency.
"The Mimosa research satellite (the Czech Republic), designed to measure atmospheric pressure, was successfully placed into orbit by the Briz-KM booster at 1902 Moscow time," Davidenko said.

New terminal to be built at Czech airport

A consortium of banks made up of ABN Amro Bank, Banka Austria/Creditanstalt and HSBC, will grant a nine billion Czech crown loan from the European Investment Bank (EIB), to the Czech Airport Authority (CSL) for construction of a new terminal at the Prague Ruzyne airport, CSL spokeswoman Anna Kovarikova stated, according to Interfax News Agency.
Czech banks will also take part in the final phase of the financial project, Kovarikova said. CSL officially launched the construction of the 10bn Czech crowns terminal at the beginning of July. Work should be completed by 2005. Of the total sum, nine billion crowns will be secured by the loan, and one billion crowns will come from other Czech banks or from "alternative sources," the spokeswoman was quoted as saying. The new terminal will increase the capacity of the Ruzyne airport by 3.5 million to 10 million passengers. CSL will draw the loan from the EIB under advantageous conditions, including interest at PRIBOR. 
The loan is to be payable in 25 years with the option of postponing payments for six years. In addition to the new terminal, Transport Minister Milan Simonovsky is also pushing for a new runway for Ruzyne which would cost somewhere between five to seven billion crowns.

Czech Airlines flying towards sell-off

Czech Airlines (CSA), the country's national air carrier, could be privatised within the next two to three years, Transport Minister, Milan Simonovsky, was quoted as saying by Interfax News Agency. Simonovsky said he would lobby for the sale of the state's stake in CSA within the cabinet. The sale would be gradual and would involve CSA's fellow SkyTeam alliance members, according to the transport minister.
The potential privatisation would, at least initially, concern a minority stake in the firm, Simonovsky said. Depending on the conditions, he added that he could also support privatisation of the state's entire stake. The state currently holds a 91 per cent stake in CSA via the National Property Fund (FNM) and the CKA bailout agency. CSA transported over three million passengers in 2002, a record for the airline. Other SkyTeam alliance members include Air France, Delta Airlines, Alitalia, Aero Mexico and Korean Air.

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Ukraine to supply oil to the Czechs

Ukraine has announced the possibility of supplying two million tonnes of oil per year through Slovakia to the Czech Republic using the Eurasian transport corridor, New Europe reported. Ukrainian Foreign Ministry state secretary for European integration, Alexander Chaly, said that Ukrainian prime minister, Victor Yanukovych, submitted this proposal at a meeting in Tale (Slovakia) with Slovakian Prime Minister, Mikulas Dzurinda, Polish Prime Minister, Leszek Miller, Czech Prime minister, Vladimir Spilda and Hungarian foreign Minister, Laslo Kovacs. 
"Yanukovych drew attention to the possibility of using the Eurasian transport corridor to supply oil to the Czech Republic through Slovakia. The prime minister noted the possibility of real supplies of up to two million tonnes of oil per annum by the end of this year, in which the Slovakian and Czech sides were very interested," Chaly said.

Electricity distribution consolidation hits snags over swap deal

The next steps toward consolidation in the Czech electricity distribution market are likely to take longer and be more difficult than was first suggested, electricity producer CEZ admitted recently, reports the Prague Business Journal (PBJ).
CEZ made a giant stride recently when it concluded a broad agreement for a shares swap covering four regional distributors with German power company E.ON. But negotiations with German power company RWE over a similar share swap involving CEZ's share-holding in Prazska Energetika (PRE) and RWE's 35% stake in Stredoceska Energeticka (SCE) have run into problems, largely due to the fact that RWE does not control PRE and must seek agreement from other shareholders in the Prague distribution company for any deal to take place.
Separately, CEZ itself is in no hurry to buy out E.ON's 30% shareholding in the country's largest electricity distribution company, Severomoravska Energetika (SME). That would require the company to launch a buyout of minority shareholders, CEZ operational director for strategy, Petr Voboril, told PBJ following a company news conference.
The outline swap agreement between CEZ and E.ON left the door open for the companies to conclude further consolidation deals at a later date. It is still unclear whether some cash settlement between the two companies will accompany the recent outline swap agreement involving E.ON dominated distributors Jihoceska Energetika (JCE) and Jihomoravska Energetika (JME) and CEZ-controlled companies, Zapadoceska Energetika (ZCE) and Vychodoceska Energetika (VCE).
Voboril said CEZ was unlikely to make any capital gain on the deal. "All we have is a basic agreement - the details still need to be worked out," he said.
CEZ CEO, Jaroslav Mil, told a recent news conference that RWE was interested in a swap deal but was held back by the need to win agreement from other shareholders within PRE. The city of Prague and fellow German power company GESO are among the main shareholders in PRE. RWE only has a 15% shareholding in the holding company that controls PRE.
"There are other options to a deal with RWE," Mil said. "Maybe these would be more advantageous." A number of other buyers had expressed interest in CEZ's PRE shareholding, which the company must sell to comply with conditions imposed by the Office for the Protection of Economic Competition (UOHS) when it approved the purchase of the other regional distributors.

Ministries clash over coal sale

The ministries of Industry and Trade and Finance failed recently to settle differences over how state shareholdings in brown coal companies should be sold with time running out before the end of June target for a new government policy, the Prague Business Journal reported (PBJ).
The two ministries, represented by deputy ministers, are deeply divided over the sale strategy for the two companies where the state still exerts control, west Bohemia's Sokolovska Uhelna (SU), and northwest Bohemia's Severoceske Doly (SCD).
The Ministry of Industry admitted that one of its proposed sale scenarios would demand bidders have brown coal mining experience but prevent brown coal companies in neighbouring countries from bidding for the government shareholdings.
Such conditions would allow Appian Group, which owns the already privatised brown coal company, Mostecka Uhelna Spolecnost (MUS), to buy SCD.
Asked if the conditions were aimed at favouring Appian, Ministry of Industry spokesman, Ivo Mravinac, said that there was no reason not to sell to Appian. He added that past cooperation with the company, which recently bought engineering giant Skoda Plzen, had been extremely good.
Ministry of Finance spokeswoman, Eva Novakova, would not go into detail about the disagreements with the Ministry of Industry. It was looking for a "more effective" sale, she said. "Part of that includes it being more financially effective," she added. Negotiations between the ministries should continue she said.

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Regions reveal mixed capacity to claim and process EU funding

Czech regions already have high hopes for how European Union funds will help them improve roads, the environment and boost tourism. But while some regions are well prepared to tap the promised euro millions, many appear to have only drawn up wish lists, with the necessary follow-up steps on how to actually obtain the cash unclear, the Prague Business Journal reported.
Not surprisingly, those who have performed well in the search for EU pre-entry funds appear best placed for the new, much bigger payouts that should become available after EU membership, set for May 2004.
"There are big differences among regions in their preparedness," said an official from the Ministry of Local Development, who asked not to be named. "Some of them, for example, north Moravia, north Bohemia and the Karlovarsky region, are experienced and have managed to get a lot of money from pre-accession funds. On the other hand, the central and eastern Bohemia regions have not been at all successful in gaining money," the official added.
Representatives of Melnik, one of the largest towns in central Bohemia, admit they are neither prepared for, nor have followed through on, a single large project to tap EU funds. "We don't have the experts who would be able to fill in the complex forms and ask for money. That's why we would like to create a regional entity that would do this for us," said the town's mayor, Miroslav Neumann. No clear plans exist, he added, noting that central Bohemia is plagued by poor roads and heavy traffic and could clearly benefit from EU regional funds.
A former funding success story, the Moravskoslezsky region (northern Moravia) bordering Slovakia and Poland, hopes to cooperate with its neighbours in getting EU money for transport projects. European funds could also help build the D47 motorway between Lipnik, central Moravia and Bohumin on the border with Poland, the R48 road between Cesky Tesin on the Czech-Polish border and Frudek-Mistek and other roads.
Transport projects are also the top priority of other regions. The Liberecky region (northern Bohemia) governor, Pavel Pavlik, said minor roads were in a catastrophic state there. The Olomoucky region (central Moravia) also hopes for EU funds to repair its roads, especially those in the Jeseniky Mountains.
The Karlovarsky region (western Bohemia) wants to improve its railways and would also like EU funds to promote its spas. "We would like to cooperate with European health insurance companies and provide convalescence and spa treatment to patients from the whole of Europe," said governor, Josef Pavel. The Jihomoravsky region (southern Moravia) sees great potential for EU funding to boost agro-tourism.
Some regions are reinforcing their capacity to communicate with Brussels and help local councils and the regions themselves prepare for EU funding. "We expect more staff will have to be taken on. The number of such employees must grow by around a dozen this year," said South Moravian governor Stanislav Juranek.
The Vysocina region is relying on the initiative of local associations and groups to come up with projects. "Officials will never know what is possible to do and what projects could be suggested," said regional vice governor Marie Cerna. "Our officials will mainly help people and organisation with the formal part of projects," she said adding that the region plans to hire four people for EU related tasks.
Ministries want to give a helping hand. The Ministry for Local Development established a new department, the OROSROP, which will oversee regional programs and organise training for regional officials. The training schedule hasn't been worked out yet.
The Ministry of Environment also wants to methodically help regions and municipalities create projects that can tap EU financial support, said Minister Libor Ambrozek. One of the biggest funds for eco-friendly projects from 2004 will be the EU's cohesion fund, within which the Czech Republic is going to ask for Kc15bn. "Regions will be able to use the money for the construction of infrastructure, as from the current ISPA fund, which finances construction projects in the area of transport and environmental infrastructure," the environment minister said.
The Czech Republic has received Kc5bn from the ISPA fund so far, mostly for the construction of sewerage and water treatment plants. Projects aimed at improving water and air quality, handling waste and the removal of past environmental burdens have the biggest chance of winning funds. Besides the cohesion fund, the Czech Republic will also receive money from minor structural funds in the first two years after EU entry.
The state will probably contribute Kc7.4bn on projects co-financed from the EU structural funds in 2004-2006, of which Kc6.5bn will go to projects outside the capital, Foreign Minister, Cyril Svoboda said at a news conference recently. The proposal was submitted to the government by Minister for Local Development, Pavel Nemec and Finance Minister, Bohuslav Sobotka. The government called on the two to complete a detailed analysis of possible co-financing by June 30th. Only then will the government provide more detailed information.
From 2004-2006 the Czech Republic can get €2.3bn (Kc72bn) from the EU. The EU will finance 35-75 per cent of project costs with the remainder coming from public or private sources. 

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Telecom's sale prospects boosted by Eurotel deal

The government target to privatise Czech Telecom by 2005 took a big step forward recently with an agreement to take full control of the country's leading mobile phone operator, Eurotel, the Prague Business Journal has reported.
Telecom's board of directors announced a preliminary agreement with the US consortium, Atlantic West, to buy its 49% stake in the country's leading mobile operator for US$1.05bn (Kc 27.8bn). Telecom already owned 51% of the company.
The move removes one big obstacle in the way of selling Telecom at a later date. Atlantic West was given rights when it helped found Eurotel that allowed it to block further steps to privatise Telecom.
Former bidders for Telecom, Deutsche Bank and the Danish TDC, had to negotiate last year to neutralise opposition from Atlantic West consortium partners, AT&T and Verizon, to Telecom's further privatisation. Although they succeeded, the three-year-old sale still collapsed last November after the bidders failed to improve their price and win approval for the deal from minority Telecom shareholder TelSource.
The Eurotel deal also goes a long way toward raising Telecom's value and attractiveness before privatisation by giving it a larger share of its biggest cash cow. The number of Telecom customers has been slipping as many migrate to mobile services. So Eurotel revenues will improve Telecom's figures said Jindrich Svatek, an analyst from Raiffeisen.
Analysts added that Telecom could hardly be privatised without Eurotel because of the unclear ownership relations between the fixed phone operator and its mobile arm.
The Eurotel deal has to be approved by Telecom's shareholders at a meeting on June 13th. Telecom CFO Juraj Sedivy said all shareholders, including the US companies, approved the preliminary agreement recently. It also must win approval from the Office for the Protection of Economic Protection (UOHS). 

Germany T-Systems to purchase Pragonet

The City of Prague will sell its remaining 49 per cent sate in the Pragonet telecom company to Germany's T-Systems International, a unit of Deutsche Telekom, for 300m Czech crowns, Interfax News Agency has reported.
The sale must be approved by the Czech Anti-Monoply Office (UOHS) however. Deutsche Telekom gained Pragonet assets in 2000 when it acquired 34 per cent of the firm from the City of Prague. It later increased its stake to 52 per cent through a capital hike. The stake purchase cost Deutsche Telekom US$25m. Last summer T-Systems offered 9.5m Euros for the city's remaining stake, but the offer was rejected. 
Pragonet operates a 300-kilometre fibre optic network and provides all types of domestic and international telecommunications services. Pragonet, established in 1996, employs 120 people. 

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