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czech republic

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CZECH REPUBLIC


 

REPUBLICAN REFERENCE

Area (sq.km) 
78,600

Population 
10,264,212 

Density 
(per sq.km) 
132.2

Capital 
Prague 

Currency 
Koruna 

President 
Vaclav Havel

Private sector 
% of GDP 
80%

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Background:
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: 068 - (01/01/03)

Historic NATO summit
The Czech Republic hosted a summit of NATO on November 21st-22nd which for many reasons is likely to prove an historic turning-point.
Firstly, the organisation now has invited seven new members to join, the Baltic states, Slovakia, Slovenia, Bulgaria and Romania. Slovakia's inclusion completes that of the Visegrad states; the Czech Republic, Hungary and Poland, which had already joined in 1999. Croatia, Macedonia and Albania are next in line.
The seven newcomers are to be given the protection of the NATO nuclear umbrella. They are in effect to become, along with the three existing Visegrad members, the eastern outposts of the coming Pax Americana, protectorates of the US imperium expanding into the vacuum left by the collapse of the Warsaw Pact and the USSR. 1999 and 2002 are but the logical outcome of 1989 and 1991.
As if to drive the point home, the US insisted on taking over responsibility for the aerial protection of the summit, symbolically so appropriate after 9:11. Not without reason, it stipulated that Czech fighters were not equipped for the job and brought in its own. The US Air Force patrolled the skies over Prague, indicating to the Czechs and other new members what they now needed.
The Czechs and others will be expected to replace their Soviet-era equipment with largely American military hardware, although some contracts for the French, British and German defence firms will doubtless arise. Each new member is required to bring its military spending up to 2.5% of GDP, necessitating a large rise in absolute terms for nearly all of them. But then they are all also on course to join the EU, either in the first wave, as the Czech Republic, the Baltic states and Slovenia, by May 2004, or a few years later for the remainder. They will then be eligible to receive EU subsidies on a large scale to rehabilitate their post-communist economies. In effect the EU may be financing the US defence industry and aerospace firms via NATO.
The symbolism of the NATO meeting extended beyond its aerial arrangements. Prague had been the host at the first meeting of the Warsaw Pact in 1991, when it agreed to dissolve itself. Czechoslovakia, as it then was, would never have been part of the Soviet bloc but for the fatal Munich conference of 1938. Then, the Western powers sold out to Nazi Germany, whose defeat by the USSR by 1945 brought it fatally into the reach of Moscow, confirmed by the communist coup of 1948. Appeasement of totalitarianism saw it lost to the West; its confrontation in the Cold War triggered its collapse in 1989-91. To hold the key meeting of NATO expansion eastwards in Prague sent out the message to all and sundry at an appropriate moment, as the US and the UK are preparing to oust Saddam, that never again will dictators be appeased in Europe or its near abroad in the Middle East.
It is in this context that the rough treatment meted out to two would-be gatecrashers at the conference can be understood. President Alexander Lukashenka of Belarus, the 'last dictator of Europe,' was refused a Czech visa to attend on the second day when the leaders of the larger 46-member Euro-Atlantic Partnership Council were due to convene. Although Belarus is one of the partners, its leadership was deemed unacceptable at the conference.
This decision on November 19th had been occasioned by Lukashenka's refusal to allow the monitoring group of the Organisation of Security and Cooperation in Europe (OSCE) to operate in Minsk after it had denounced his re-election as illegal. This was in September 2001, when he supposedly won 75% of the vote.
President Leonid Kuchma of Ukraine, a far more important country, was a bigger problem. He was allowed to attend, but was relegated to the sidelines by a clever ploy of Lord Robertson, Secretary-General of NATO. Instead of Ukraine's leader sitting between those of the US and the UK, as an arrangement of seats according to the alphabet in English (the normal language used in NATO) would have ordained, the seating was organised in French, whereupon Kuchma found himself next to the leader of Turkey on the one hand and to empty space on the other. Back to the bottom of the class. Again the symbolism is only too apparent.

New government hits trouble
The Czech Republic had elections in June which saw the ruling Social Democrats re-elected, forming a new government, however, with two fresh coalition partners. The economy at the time was in the third year of solid growth and the Czechs were looking forward to being invited into the EU at the Copenhagen summit in December, after hosting the key NATO summit in Prague in November.
But things began to go wrong in late summer with devastating floods that have inundated Prague's ancient centre, but also its old industrial quarters and towns and villages further up and down the Vitava river. The cost of the damage, now estimated at Kc70bn, has dashed the Social Democrats' electoral promise to build a Scandinavian-style welfare state in the Czech Republic, the first step of which was to raise social spending, now being reduced. 
The new premier, left-winger Vladimir Spidla, is well liked, but is increasingly seen as lacking the dynamism of his predecessor, Milos Zeman, and his luck. Against the advice of Zeman, Spidla formed a coalition with two small centrist parties that gave the government just 100 seats in the 200-member parliament. The leader of the smallest one, Hana Marvonava, however, resigned over the decision of her own Freedom Union to join the coalition and has become a thorn in the side of the government.
She has voted with the opposition to reject a package of tax rises to pay for the flood damage and has won concessions before she finally allowed the 2003 budget to pass, while demanding a long-term plan of action to reduce the deficit. Clearly a majority of one was vulnerable to one coalition member of parliament holding Spidla to blackmail. That it has been someone heading a coalition party makes it worse.
Spidla's socialist programme is being whittled away, about which the other coaltion partner, the Christian Democrats, are not at all unhappy.

Presidential election the key
President Vaclav Havel is standing down in January, as the constitution demands after two terms. The disillusioned members of Spidla's coalition, many having owed everything to Zeman for years, are keen to see the ex-premier succeed Havel. Should he do so, he would be in a position to cause a lot of trouble for Spidla, who unavailingly tried to block his candidature, thereby definitively alienating him.
Zeman as president could come to overshadow Spidla, the very eventuality the premier feared, and make the coalition with the Freedom Union and the Christian Democrats impossible. Spidla would then be obliged to rely on the implicit support of the unreformed Communist Party or of the centre-right Civic Democrats of former premier Vaclav Klaus, an old opponent of Zeman's, who became his prop at the end by backing the Zeman government. Both alternatives would leave Spidla gravely weakened and strengthen the power of the president.

Uncertainty imperils EU entry
The Czechs are due to join the EU by May 2004, if all goes well in a referendum on the issue due in June next year. At the moment polls put the 'pros' at 43% and the 'antis' at 36%, which still leaves 21% 'don't knows' capable of upsetting the bandwagon.
The chances are the government will pull though. The re-election of Schroeder is a boon to Spidla, because Stoiber and other right-wing leaders in the EU were calling for an apology by Prague for the expulsion of 2.2m Sudetan Germans in 1945, which would certainly deeply offend the opposition parties and many in the coalition. Czech entry looks likely to go ahead. 

Economic strategy still uncertain
The government is not yet committed to one course of action to finance reconstruction. Returning to its radical populist instincts is one option, soaking the rich or better-off by a tax hike. 
This has been widely criticised. For it could lead to a brain drain abroad. No longer are Czechs restrained from foreign travel, while their language skills are generally high, especially among the upper strata, who speak German as a matter of course and usually excellent English too.
Another way of funding the reconstruction would be 'flood bonds,' issuing bonds for reconstruction. The same people would be likely to be involved, but as investors not tax-payers, with foreigners chipping in too. Such is the course being urged on the government by orthodox financiers. It should be evident which way it will jump before the end of the year. 

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BANKING

Battle for survival becomes a competition for clients


The big Czech banks which once struggled simply to survive, are now fighting a fiercely competitive battle to win clients, cut costs and raise profitability, the Financial Times reported on November 21st.
The sector, traditionally the most developed in central Europe, is finally achieving its true potential after the costliest rescue programme in the region.
In the 1997-99 recession three of the four big banks became, in effect, insolvent and Investicni a Postovni Banka (IPB) actually collapsed in 2000. It was no longer possible to hide the fact that many loans had been handed out to management cronies or for political reasons and would never be repaid.
After a rescue programme - which the International Money fund estimates will cost 21 per cent of gross domestic product - the banks are now solvent, almost entirely foreign-owned and consolidated.
Capital adequacy, the key measure of financial strength, was 15.4 per cent in June compared with 9.5 per cent at the end of 1997. Today 95 per cent of bank assets are owned by foreign investors, the highest proportion in the region. And following the takeover of IPB by Ceskoslovenska Obchodni Banka (CSOB), the former state foreign trade bank bought by KBC of Belgium in 1999, the three biggest have 65 per cent of total banking assets.
"The basis has been laid for the Czech banking sector to be one of the best systems in Europe, three equally-sized large commercial banks which have different priorities but fight for the same clients," says Andreas Treichl, chief executive of Erste Bank of Austria, owner of Ceska Sporitelna, the main retail bank.
Competition has increased as the three hunt market share while foreign bank branches try to cream off affluent retail clients and blue-chip companies. This competition, added to the fact that Czech interest rates are lower than in the eurozone, has led to shrinking net interest margins, now near three per cent.

Investmart now majority owner of Union Group

Shareholders of Union Group, 75 per cent owner of Union banka, have transferred their majority stake to Italian financial group Invesmart, Union banka spokesman, Josef Rericha, said. The central bank approved the new owner's entry in Union banka in October, following the May signing by Invesmart of a contract for the purchase of 70 per cent of Union banka shares from Union Group for 2.833bn Czech crowns.
The Italians, together with the Ostrava-based bank, will also get Union Group's additional members: Union pojistovna, Bank Przemyslowy and the CDZ company, which is providing customs guarantees, Bluebull reported.
Union Group's remaining shareholders include the Vitkovice, Nova hut, Severomoravska plynarenska and Severomoravska energetika companies, bail-out agency Ceska konsolidacni agentura (CKA) and the town of Ostrava.

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DEFENCE INDUSTRY

Czechs plan to enter arms markets of new NATO members 

The Czech Republic wants to try to penetrate to the arms markets of the countries which were newly admitted to NATO, the daily, Lidove noviny, has written, CTK News Agency has reported .
The Czech Defence Ministry intends to start its "eastward expansion" by exporting 250 T-72 tanks but according to experts the country can offer much more, the paper says.
"Some types of weapons from the army stores are relatively modern and of good quality. In addition, they are cheap and are produced by a NATO member state which is the Czech Republic's great advantage," a source from the Defence Ministry told the paper.
The National Security Council has already made decision on the sale of the 250 T-72 tanks, the paper says. The export is to start at the end of 2003 and the beginning of 2004. In its resolution the council mentioned Morocco, Algeria, Malaysia, Nigeria, India, Vietnam and Finland as serious potential buyers.
"However, attention is also directed towards Hungary, Bulgaria, Romania, Slovenia, Slovakia and Yugoslavia," the paper quotes the document as saying.
First Deputy Defence Minister, Stefan Fuelle, told the paper that that did not mean any radical change in the trade strategy because these are countries with which the Czech Republic is developing intensive contacts in the security sphere.
"However, it is true that with the invitation (of new countries to join NATO) better conditions for cooperation will be developed. In addition, the armies of the new NATO members will have to undergo a thorough technical transformation and that is more than certain," he adds.

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ENERGY

Unipetrol readied for new sale with few conditions

The Czech government in late November relaunched the privatisation of the country's biggest petro-chemical group, Unipetrol, in spite of the costly failure to sell it the firsttime around, the Prague Business Journal has reported. 
Last December the government controversially picked the €361m (Kc 11bn) bid of Anddrej Babis Agrofert Holding to buy the 63 per cent government shareholding. Agrofert backed out of the deal in the autumn after Babis asked for the selling price and conditions to be renegotiated.
In the interim, the August floods, the high level of the crown (in which most of the group's costs are denominated) and the depressed sate of global refinery and chemical markets have taken their toll on the price the government is likely to get.
"I think the government will earn less than last time around," said Roman Cenek, an energy analyst with brokerage, Atlantik Financni Trhy. No clear favourites have emerged for the Unipetrol stake, he added. "The winner will depend very much on the offer price," he said.
The ministries of finance and industry and trade will draw up basic terms for the privatisation in January. Minister of Industry and Trade, Jiri Rusnok, said that it will relax some of the previous sale conditions, in particular those banning the buyer from restructuring or selling some of the assets for eight years.
However, Rusnok said that the government would like to include guarantees covering the supply of raw materials between different parts of the company.
Refinery company, Ceska Rafinerska, is one of the main suppliers of raw materials to the chemical and plastics division of the group. This did not, however, prevent fights from flaring up between companies earlier this year over prices of supplies.
Agrofert's Babis cited the heavy penalties for failing to honour these supply agreements, which were written into the privatisation contract, as one of the reasons he pulled out of the deal.
Another complicating factor is the previous partial sale of a 49 per cent shareholding in Rafinerska, one of the group's main assets, to a group of western oil companies that belonged to the International Oil Corporation (IOC). Rusnok said that concrete terms of the next privatisation tender will depend on whether some of the disputes between the western shareholders and Unipetrol about Rafinerska are resolved.
Members of the IOC, Agip, Conoco and Shell, were given the option to buy out the government's majority share in Rafinerska under their previous agreement. They chose not to exercise the right during the previous sale, although Conoco attempted to buy the Benzina gas station company and increase its shareholding in Rafinerska alongside partners.
The pre-emption right should exist again under a new privatisation. "The IOC has certain rights regarding Rafinerska, and these have not changed," a spokesman from ConocoPhillips, the oil company created out of the merger between Conoco and Phillips in August, said. 

OKD outlines plans for massive miner lay-offs

Mining firm OKD's employment development plan, made available to CTK News Agency, plans massive lay-offs of miners, preferring instead to use hired labour, mainly foreigners, so as to spend less on social and health insurance. By 2007, OKD will employ more than 3,700 hired miners or 2.5 times more than the current number, the Czech News Agency reported. "The number of hired staff increases every year and we strongly disagree with it," trade union leader, Miroslav Syrovy, told CTK. 
He believes OKD should only reduce the number of hired miners, which would lead to the desired staff reduction - a necessity in light of the planned lowering of coal extraction. The company extracted 11.5m tonnes of black coal in 2001 - a amount that is expected to fall by 1.5m tonnes by 2007. Karbon Invest, 50.02 per cent owner of OKD, wants to replace local staff with hired miners hailing from Slovakia and Poland. OKD spends an annual 600m Czech crowns on social and health insurance payments.

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ENVIRONMENTAL SERVICES

Anglian weighs bids for Czech regional water assets

British water company AWG Plc said recently that it had received interesting offers to purchase its international division, one of whose main assets is the company's Czech regional water infrastructure and services, the Prague Business Journal has reported.
AWG Plc CEO, Chris Mellor, said that it has received offers of more the £20m (Kc 9.6bn) for the international services division from businesses mainly based in the Czech Republic and Chile, but with other assets in China, Ireland and Thailand.
Czech operations of AWG subsidiary, Anglian Water Europe, are focused on Vodovody a Kanalizace Jizni Cechy (Vak JC) Severomoray-skych Vodovodech a Kanalizace Ostrava (SmVaK) and Vodovdy a Kanalizace Beroun (VaK Beroun).
Anglian has a 95 per cent stake in Vak JC, which has long-term contracts to supply water services across most of southern Bohemia with the exception of Ceske Budejovice.
It has a 54 per cent shareholding in the north Moravian SmVaK, which owns infrastructure and provides services. Anglian has a 58 percent stake in Vak Beroun, whose assets are mostly in infrastructure but also has long-term service contracts. Altogether, Anglian provides water to around 1.2m Czechs.
Prague-based regional director for European operations, Peter Simpson, said Mellor's comments suggest a sale is near, but he added that no final decision has been made and final offers from the bidders still have not been received. Anglian invited bids for the international division earlier this year.
"It is still up to the AWG board to make the final decision… The message is that things are looking promising over-all," Simpson said. "I do not expect anything on the sale in the next couple of weeks, but the transaction could be closed by the end of the financial year; by the end of March2003."
Simpson added that the intention is to sell the Czech assets as a whole and not piecemeal. Anglian has been one of the main foreign companies fighting for a share of the Czech water services market as local, mostly council-owned companies started selling long-term management contracts or infrastructure in the late '90s. It entered the Czech market in 1995 with the purchase of a 30 per cent stake in Vak JC, later buying more shares in the company. Further investments resulted in making it the third-largest UK investor in the Czech Republic.
At the height of its Czech ambitions in 2001, Anglian initially put itself forward as a bidder for the long-term contract to manage Prague's water services. Later, however, it withdrew from the controversial race and instead decided to back the eventual winner of the bid, Vivendi Water. Anglian offered to provide technical and other support services to Vivendi. 
Neither AWG in London nor the local Prague office was willing to comment on who the possible bidders for the Czech and other international services could be.

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FOREIGN INVESTMENT

Appian Group to buy stake in Skoda Holding

Appian Group, a US-based investment company, is to pay Kc350m (US$11.6m) for the Czech state's 48 per cent stake in Skoda Holding, the loss-making engineering group, including its Kc3.8bn in debts to the state, the Financial Times has reported.
Skoda, once the biggest Czech engineering company, is battling against insolvency after the failure of a debt-restructuring plan agreed two years ago.
Skoda Auto, the successful carmaker owned by Volkswagen of Germany, is not linked to the group.
The Czech Consolidation Agency, the state's bad debt depository, accept Appian's bid in late November, after earlier disqualifying two rival bidders. The deal is expected to be approved by the cabinet shortly.
"I would rather a less opaque and strong buyer would appear but, in the present circumstances, no-one will appear," Jiri Rusnok, industry minister said in October. "It is imperative to take a quick decision on the ownership structure of Skoda."
"This new owner could have a positive role in stabilising the main branches of the business," he added, "but Skoda will never return to the old glory which is remembered so nostalgically in Plzen."
Appian, which refuses to reveal its shareholders, plans to pay another Kc450m to buy out the 52 per cent stake owned by Skoda Plzen, the original parent company, which is in receivership.
This should help repay the company's remaining Kc2bn in interest-bearing debt to other creditors but is bound to lead to redundancies among its 6,500 workforce.
In a reminder of Skoda's past problems, a Plzen court acquitted Lubomir Soudek, Skoda Plzen chief executive from 1992 to 1999, on charges of embezzlement.
Mr Soudek, the most famous Czech industrialist of the 1990s, styled himself the saviour of Skoda but his ambitious acquisition programme burdened it with massive debts.

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FOREIGN LOANS

EIB grants 40m Euro in global loans to OVAG

The European Investment Bank (EIB) is granting two global loans of 20m Euro each to Volksbank CZ a.s. and VB banken (AG (OVAG) group in the Czech Republic.
Global loans take the form of credit lines made available to banks or financial institutions which onlend the proceeds under their own management, at their own risks and own conditions for small- or medium-scale investment projects meeting criteria set by the EIB, New Europe has reported.
The global loans to OVAG will be used to finance small scale environmental, energy saving, industrial, infrastructure and tourism projects undertaken by private and pubic sector promoters (including municipalities), an EIB release informed. These loans are the first global loans signed with the OVAG Group.
OVAG will be the first EIB partner benefiting from the SME Finance Facility (SME FF), a special scheme promoted by the European commission under the PHARE Programme. The SME FF aims at supporting term financing for the smaller segment of the SME market and provides the partner bank with an incentive in the form of a specific contribution to further develop a strong and competitive SME sector in the accession countries.
The EC has made 45m Euro available for the implementation of the SME FF with the EIB, which will in turn allocate a minimum of 450m Euro of its global loan financing for the SME FF. With these loans, the total mount of global loans in the Czech Republic amounts to 337m Euro, which brings total lending for the that country up to 3,345m Euro.

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MINERALS & METALS

Panel rejects LNM bid for Vitkovice, says it's too low

Multinational steel group, LNM Holdings, based in the Netherlands, won't acquire steelworks Vitkovice Steel after all, Prague Business Journal has reported.
"The current bid is unacceptable to us, and that's why we are not recommending the sale to LNM unless it upgrades its offer," said Frantisek Kubelka, deputy minister of industry and trade and chairman of the ministerial commission - including representatives of the Finance Ministry, the Ministry of Industry and Trade and the National Property Fund (FNM) - that was created to advise the government on the sale. Barring any fresh offer from LNM, this would appear to be the last word from the government.
In June, the government granted LNM six-month exclusivity for bids for the 98.96 per cent majority in the steel works that the state holds through Osinek, an arm of the FNM. The Dutch group offered some Kc 680m for Vitkovice Steel, while Osinek bought the company for Kc 3.31bn on the basis of a thorough appraisal in May this year. Osinek's CEO, Jiri Stanek, said that the sale of the stake for less than Kc 3bn is out of the question.
The government need not accept the bid at any rate, Finance Minister, Jiri Rusnok, had said earlier. "If the bid is not advantageous for the state, we will simply not accept it," he said in mid-November when LNM submitted its offer. The government said it has not set a minimum price for the steelworks but that ideally, it would like to sell Vitkovice Steel for the same amount paid by Osinek.
Besides the purchase price, LNM offered guarantees worth some Kc 2.3bn. One of the guarantees, worth Kc 1.8bn, concerns the payment of a loan drawn by Osinek from state-owned bail-out agency the Czech Consolidation Agency in April 2000 for the financing of steel production at Vitkovice. LNM also said it wanted to invest Kc 1bn in Vitkovice Steel in seven years and to spend another Kc 500m to pay an obligation which emerged after the separation of Vitkovice Steel from the parent Vitkovice company.

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NUCLEAR ENERGY

Russia signs nuclear fuel deal with Czech Republic

Russia's Atomic Energy Ministry signed agreements with Czech organizations for the supply of tens of millions of dollars in nuclear fuel to the Czech Republic, Interfax News Agency has reported. These supplies will serve as payments for the former USSR's debt, [Russian Atomic Energy] Minister Aleksandr Rumyantsev told a news conference in Moscow on 29th November.
Russia also plans to supply hundreds of kilograms of highly-enriched uranium for a research reactor in Poland.

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TRANSPORT

Authorities decide on airport link

The Ministry of Transport, the City of Prague and the Central Bohemian regional authority recently signed a memorandum that end the debate over how best to link Prague's Ruzyne airport with the city centre. Three options were up for consideration: extending the metro, building a new speed rail or updating the current railway link to Kladno with an extension to Ruzyne. Representatives of the three authorities chose the last option, Prague Business Journal reported.
"This memorandum gives a clear signal that we have all agreed on the priority of upgrading the existing railway," noted Pavel Stoulil, deputy transport minister, who signed the agreement on behalf of the ministry. Extension of the metro was a very expensive proposal, while the rail extension link to the airport will be of a higher standard than regular trains and will significantly ease traffic, he explained.
Private capital is called for as cost estimates for modernisation of the rail range from 8-13bn Czech crowns. Stoulil said that to this end "A model of combined financing has been proposed," with provisions having been made to extend an invitation to private investors. He gave London's Heathrow Airport as an example of an instance where public-private financing was successful. Ceske Drahy plans to build a new terminal in Kladno to serve passengers flying into Ruzyne and wanting to catch long-distance trains without going through Prague.

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