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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: 081 - (01/02/04)
The Czech Republic is basically one of the most stable and prosperous of the post-Communist states. As the dominant part of Czechoslovakia before the Second World War, it had an economy that was the most advanced in certain respects on the continent of Europe, with the highest standard of living. Communism had a baleful effect, but from 1989 it has been in the fast lane of the transition economies to capitalism. The split from Slovakia from 1993 was managed surprisingly successfully by both parties.
It has been recovering from recession since mid-1999. Growth in 2000-03 was led by exports to the EU, especially Germany. Foreign investment has played a major role, now amounting to over $20bn, while domestic demand is reviving. Uncomfortably high fiscal and current account deficits could be future problems. Unemployment is gradually declining as job creation continues in the rebounding economy. Inflation is moderate.
The EU placed the Czech Republic just behind Poland and Hungary in preparations for accession, which from May should give further impetus and direction to structural overhaul. Reforms to complete banking, telecommunications, and energy privatisation should encourage additional foreign investment, while intensified restructuring among large enterprises and banks and improvements in the financial sector should strengthen output growth
Economy strong in its commercial competitiveness
To get the true flavour of what is happening to the economy of the Czech republic it is better to look at a breakdown of its trade figures, rather than the macro-economic statistics, which are still only moderate. Everyone is waiting for a pick-up in the EU economy to enable the Czech economy to start growing again as it did in the 1990s. GDP growth is expected to be 2.5% for the year.
The current account deficit exceeds 5% of GDP and recovery is only likely from an export-led expansion as the Germans and others move out of the doldrums.
The republic is well placed here to benefit from a coming German boom. Germany accounts for 33% of its imports, but takes an even higher proportion of its exports, 38%.
As for Austria the Czechs even before the awaited recovery have recorded a trade surplus for the first time with it. The reason is that Austrian firms are investing in their neighbour in great numbers and then exporting homewards.
The Austrians, as the former rulers of Bohemia, remember well that it was the richest and most economically dynamic province of the Austro-Hungarian Empire. But the Europeans are getting the message too - invest in the Czechs; they are coming back to Europe.
Government in office, but not in power
The Czech government on the other hand is weak, kept in place only by the conviction of the opposition that it would be more trouble than it is worth right now to eject it. In office the government may be, but not really in power.
It has a bare 100 seats in the 200-seat parliament, just enough to hang on. It manages consequently just to scrape by in defeating no confidence motions against its continuation.
The opposition, led by the conservatives, allied to their former chief, Vaclav Klaus, now the president, are keeping up a constant stream of carping at whatever the government does. It is being held responsible for all ills of the body politic. But nobody wants to throw it out just yet.
The EU beckons
There is a general expectation that everything depends on the success or otherwise of Czech adhesion to the EU, due in May. To reach EU standards, the country still needs to improve food safety, upgrade transport and speed up reforms of health and welfare. Above all it needs to tackle corruption.
Tourism was slack last summer, with a second year of bad weather at just the wrong time, in 2002 from drought, in 2003 from flooding. There are few Czechs who do not accept that global warming is happening and playing havoc with their weather.
Czechs block foreign firms from tenders
For other Europeans to emulate the Austrians is not so easy, without their special connections and pedigree. The Czechs evolved a system of crony capitalism in the 1990s, which is not really compatible with the ideal of an open EU state. The closed nature of the privatisation process in the republic has long been a source of controversy. A recent example of the problems involved is being shown in the energy sector.
Foreign energy firms are being blocked from taking part in the privatisation of the Czech brown coal mining industry, making domestic firms clear favourites to buy up the sector at bargain prices.
International Power (IP) of the UK was prevented from bidding, together with Demir Export of Turkey and Allianz of Germany, for 50% of Sokolovska Uhelna. Only the firm's management and a local black coal mine, OKD, have been allowed to complete due diligence. IP is protesting to Spidla himself and to the EU.
In another tender, for 55% of Severoceske Doly, only Appian Group, a financial business that owns the Mostecka Uhelna Mine, Penta Group and J&T Group, two Slovak corporate raiders, were allowed to progress.
CEZ, the dominant Czech power generator, also failed to qualify for both tenders. Of the 14 bidders in the two tenders nine were disqualified. This leaves the field clear for three local mining companies and Slovak financial groups.
The European Commission has already requested clarification of the tender conditions because of the suspicion that they were designed to exclude EU bidders, as is now evident. This is in contravention of the country's 1993 Europe Agreement. The republic has a way to go to come of age economically.
LUKoil dumps "ineffective" Czech filling stations
Russian oil major, LUKoil, recently got out of the retail business in the Czech Republic, selling its three filling stations that the company considers inexpedient to operate, Interfax News Agency quoted the company press secretary, Dmitry Dolgov, as saying.
LUKoil investor relations chief, Gennady Krasovsky, said that the company is not planning to generally cut its share of the retail market. "We are looking to increases sales through retail," he said. Selling the Czech filling stations was done under the restructuring of company sales assets. "We are divesting ineffective assets, though the company will be expanding its position on promising markets," Krasovsky said.
"A small number of gas pumps in the Czech Republic has not allowed for effective retail oil product sales. Furthermore, two months ago, the company acquired the Serbian company, Beopetrol, which commands 20 per cent of the fuel market in Serbia and allows for selling oil products in the Balkans effectively," he added.
Royal Dutch/Shell bought LUKoil's three Czech filling stations, increasing the number it owns in the country to 141. The Czech Republic's antitrust authorities should approve the deal. Those were LUKoil's only filling stations in the republic. LUKoil had earlier declined to bid in a tender for 63 per cent of the stock in the Czech oil refining concern, Unipetrol.
At the end of September, the Serbian government signed off on LUKoil buying 79.5 per cent of Beopetrol for 177m Euro. LUKoil also took on investment obligations to put 85 million Euro into Beopetrol's development over five years and put five million Euro into social
FOOD & DRINK
Beer exports set to surge, but 'raw materials' could be a problem
Although the number of beer sector acquisitions and mergers increases each year, it's difficult to talk about a global market or even a continental market for beer. Markets are still overwhelmingly national, and invariably they have their own specific characteristics, the Prague Business Journal has reported.
The Czech beer market is no exception. Czechs on average drink 160 litres of beer a year per capita with consumption dominated by one beer, pilsner.
Czech drinkers have a discerning palate when it comes to different tastes and smells and are conservative when faced with new types of beer. Although there are literally no barriers to importing beer into the Czech Republic, beer imports make up less than 2 percent of domestic sales. On the other hand, Czech exports account for 12 percent of total production, significantly exceeding the European average.
The Czech beer market has another distinguishing characteristic. Unlike traditional European beer markets, consumption is stable and not decreasing and an increasing number of women are drinking beer. The demand for draught beer is also continuing to rise.
Like most European markets, beer production in the Czech Republic has consolidated. The five largest producers control over 80 per cent of the market. Another 25 smaller breweries mostly produce regional specialties with average production of less than 200,000 hectolitres a year each.
Heavy investments after 1989 contributed to the consolidation. Brewers invested in technical equipment bringing the quality of beer up to the standards, for example, of neighbouring Germany. But some investments were planned unwisely, and as a result some companies went bankrupt. Despite this, overall production capacity exceeds output by 25 per cent, leading to fierce competition on the market and making it difficult to raise prices. This results in industry permanently suffering from low revenue margins.
The situation has improved somewhat since foreign strategic partners entered Plzensk Prazdroj and Pivovary Staropramen and raised their export potential significantly. Budejovicky Budvar is traditionally also a very strong exporter. Exports of Drinks Union and Starobrno have also risen strongly.
After EU accession, most problems will focus on side issues associated with the brewing industry rather than the industry itself. One of these could be the supply of basic raw materials. Some of these may be exported abroad because prices are higher in Western Europe.
Activities of crop growing stations may also be threatened. The solution would be close cooperation between brewers and malt barley and hop growers, which is still lacking.
Transportation of beer may be another problem. Technical specifications of some Czech trucks don't correspond to European norms, and drivers don't currently follow safety rules such as compulsory rest breaks. The solutions are not difficult, but they are likely to increase transportation costs.
The main positive aspect of EU accession is that exports of Czech beer will rise even faster than in the past. Export opportunities will grow in countries that join the EU alongside the Czech Republic, mainly Poland and Hungary.
MPs vote to allow construction of two dams on Labe
River shippers scored a victory recently in a war that has been raging between environmentalists and the Ministry of Transport when MPs approved an amendment that would allow two crucial dams on the Labe River to be built that shippers say are needed to keep them in business year round, the Prague Business Journal has reported.
The battlefield will now move to the Senate where the Ministry of Environment hopes the amendment to the law on domestic navigation will be voted down. I hope the Senate will realise the importance of our international commitments and will not vote for such an anti-European bill," said Minister of Environment, Libor Ambrozek.
The river shipping industry has long desired the dams, which they say are urgently needed to fight seasonal water shortages. But for the industry, the fight over the Labe epitomises the ongoing dispute between the Ministries of Environment and Transport.
Shippers say the two dams - one at Prostredni Zleb and another at Male Brezno on the Labe River will greatly reduce seasonal fluctuations in water levels on the lower Labe and make it navigable for most of the year. The plan to build them, which had been in the works for almost a decade, was blocked by environmental activists and nature reserve authorities who said they would damage the river's unique banks and its protected nature.
In December the construction of two dams on the Labe suffered a blow when the Ministry of Environment refused to grant the exception that would have allowed them to be built. But that didn't take the wind out of the sails of the river shippers who pinned their hopes on the amendment to the bill on domestic navigation. Miroslav Sefara, of CSPL, a Decin-based shipping company, said "I'm really happy. It's a victory for common sense," he said.
The amendment allows riverways of international importance that lie in protected areas to be exempt from the law on the protection of nature.
That's just what worries environmentalists. "River constructions would get out of public control and into the hands of forwarders, whose main interest is good navigability," said Arnika's press release, which was signed by 11 other NGOs and called on MPs to vote against the amendment.
Activists, as well as the Ministry of Environment, said the amendment is in conflict with EU legislation and the international Bern agreement on nature protections, and if broken could result in sanctions.
"Because of the negative ruling (about the construction of the dams on the Labe) there was only one solution left: to change the bill on the protection of nature by excluding the most important water ways from the bill," said Ludmila Roubco, spokeswoman of the Ministry of Transport.
Meanwhile, further down the river, the Ministry of Environment decided to allow construction of a canal in Prelouc that will make the Labe River navigable all the way to Pardubice. The move was well received by locals, especially by Pardubice town hall.
"We welcome the permission because the town has plans to build a port next to an existing and successful industrial zone and that would provide additional means of transport that are ecological and economic," said Michal Zitko, spokesman for the town hall. The town and other regional stakeholders have been awaiting the construction for almost a decade.
The regional authority with the town administrations of Parduice and Prelouc have set up a company, Pristav Prdubice, that will deal with the investment plan to build a proper industrial port once the canal is on the way.
But CSPL's Sefara said that without the dams on the Labe, the Prelouce canal could end up being a waste of money. "The transport from Pardubice will obviously want to continue beyond the Czech borders, but without the dams on the Labe, it won't be possible."
Danish TDC shows interest in Czech operator shares
Danish telecommunications firm, TDC, has expressed serious interest in acquiring a 51% state-owned stake in the dominant Czech fixed line operator, Cesky Telecom (CT), IT Minister, Vladimir Mlynar, has confirmed, following a recent meeting with a TDC representative initiated at TDC's request, Interfax News Agency reported.
In their meeting, Mlynar informed TDC that under the current law, the finance ministry is responsible for CT's privatisation, and promised to inform Finance Minister, Bohuslav Sobotka, of the meeting's details. The IT ministry will play the role of expert advisor in CT's privatisation, Mlynar said.
TDC has attempted to buy into CT twice, but each attempt failed. In the initial try, TDC went after a 27% stake in CT in 1995, but that share was eventually sold to the TelSource consortium. In 2002, TDC lodged a joint bid with Deutsche Bank of 1.82bn Euro for a 51% stake in the firm. The sale did not go through, however, after TelSource failed to accept the price offered for its stake. TelSource had an agreement on joint action in the sale of CT shares with the Czech state. Recently, however, TelSource sold its stake to financial investors, which could simplify the privatisation of the state's share.
TDC plans to vie for CT again, but probably without Deutsche Bank this time, a trustworthy source close to the Danish operator told the CTK News Agency. TDC controls 100% of domestic alternative carrier Contactel. Until last summer, it was a member of the Bivideon consortium, a majority shareholder in the telecoms firm Ceske radiokomunikace. Bivideon is now controlled by Deutsche Bank. CT should be sold this year. The government is to decide on a privatisation plan early this year.
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