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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: 080 - (01/01/04)
Economy strong; government weak
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.
But the Austrian press are telling a different more optimistic story. Even before the awaited recovery the Czechs have recorded a trade surplus for the first time with Austria. The reason is the Austrian firms are investing in their neighbour in great numbers and then exporting homewards. The Austrians can truly say in the immortal words of President Bush on the campaign trail: "We sell most of our exports abroad."
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. They are, indeed joining the EU in May. FDI now tops $20bn and is as high as in Hungary, which has a more open economy.
The Czech government on the other hand is weak, kept in power 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.
A bugging scandal
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.
There is a scandal concerning the bugging of the car telephone of parliamentary deputy, Josef Hojdar, who is in the governing Social Democratic Party, but disaffectedly so. The prime minister, Vladimir Spidla, is harassed enough already and is not prepared to let malicious gossip by opposition politicians make political capital out of the affair. He has categorically denied that either the Security Information Service (BIS) or the the Military Counterintelligence Service (VOS), let alone the police, are behind it. He dismisses as "nothing but speculation" any such insinuation, saying that there is "no circumstantial evidence" to substantiate their involvement.
Defence Minister Miroslav Kostelka and Interior Minister Stanislav Gross stated a day earlier that none of the services they oversee was involved in any way. The scandal reflects a paranoia by the opposition that the government is up to any dodge to keep itself in office.
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 this year. 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.
Competition drives Skoda to apply new standards
Ahead of the liberalisation of the car distribution market, automaker Skoda Auto will evaluate all of its 203 dealers and renew cooperation only with those "fulfilling qualitative standards," the company's spokeswoman, Katerina Svejdarova, said recently, the Prague Business Journal (PBJ) reported.
The company is preparing a new distribution contract with its dealers that is scheduled to take effect on July 1st, Svejdarova said.
The company will look at each dealership's marketing strategies and the professionalism of its sales staff, among other criteria, she said.
Several car dealers contacted by PBJ said that they hadn't yet been informed of the conditions of Skoda's new contract, but they were braced for the worst.
On October 1st, 2003, a new EU block exemption regulation governing the way car manufacturers distribute their cars in Europe became effective in the European Union. It's not clear yet when the new regime will come into force in the Czech Republic, but following negotiations between the Office for the Protection of Economic Competition (UOHS) and the car industry, new rules are likely to become effective in November 2004.
The European Commission decided to implement the new sales regime to boost competition, end manufacturers stranglehold over their dealers and harmonise the prices of cars within the EU. Under the previous regime, carmakers charged up to 50% more for the same model in some EU countries. Under the new regime, dealers will also be allowed to sell cars produced b6y rival manufacturers in the same showroom.
But with a healthy, almost 49% market share in the domestic market, Skoda Auto isn't afraid of competition as its in the position to maintain control over its dealers, Svejdarova said.
According to the company's estimates only 15 dealers are unlikely to meet Skoda's new, more stringent quality standards and lose their contracts, Svejdarova said. She wouldn't say how many dealerships Skoda owns or how many are operated as franchises. Skoda doesn't aspire to own its network of dealers, Svejdarova said.
Some foreign carmakers are already negotiating to sell their autos through other dealerships in the country including Skoda's, several car importers said. Mostly Japanese and South Korean car produces are trying to enter more showrooms in the country.
Sobotka and Tuma agree state bonds on foreign markets
Finance Minister, Bohuslav Sobotka, and Czech National Bank (CNB) Governor Zdenek Tuma have agreed the state may issue bonds on foreign markets, Interfax News Agency reported. The announcement was made by the CNB after a recent meeting between Tuma and Sobotka.
The two agreed that "under suitable conditions" on the financial market, foreign bond issues would be a legitimate method of state financing. Up until now, the issuance of foreign bonds had been restricted by an old agreement between the government and the CNB.
In mid-October, the central bank opposed a state plan to issue foreign bonds, fearing it had the potential to strengthen the Czech crown.
Ministry and CNB experts will monitor the situation on the domestic as well as foreign markets to determine when a foreign bond issue would be profitable and advantageous for the state.
The finance ministry has been issuing crown-denominated bonds to cover the state budget deficit, but the practise is becoming too expensive.
Last summer, the ministry failed to sell one bond issue, and the following issue was subscribed at a rather high rate of interest.
Some economists say the Czech currency is sufficiently stable that a foreign currency-denominated bond issue would have no significant effect on it. The original agreement between the CNB and the government was intended to slow the inflow of money from abroad at a time when the crown was strengthening markedly.
9 companies show interest in Unipetrol II
News that nine companies have already expressed interest in bidding for the state's 63 per cent stake in the Unipetrol Group surprised the market recently as expectations were for fewer bidders. Shares in Unipetrol went up 5 per cent in trading on the Prague Stock Exchange to Kc59.74, the Prague Business Journal reported.
With press speculation that some major players in the petrochemical industry - such as Italy's Agip/ENI, America's Conco-Phillips, Russian oil giant Yukos and TNK-BP - were among those expressing preliminary interest, analysts said the strong competition could result in a good price for Unipetrol, which could be further boosted by the government's decision to include Unipetrol debts with a nominal value of Kc 4.6bn (145m Euro) in the deal. Analysts put the possible price tag for Unipetrol at up to Kc12bn, not including the debts.
Some analysts said that a particularly keen interest could be expected from Polish company PKN Orlen and Hungarian firm MOL. Although registering their interest separately, the two companies have launched a merger process that will likely see them form a consortium in the next round of the tender. Czech agrochemical company Agrofert, which ended up winning the first tender to sell Unipetrol at the end of 2001 but then pulled out of the deal nine months later, confirmed it would participate in a PKN Orlen bid, but would not bid alone. The price that Agrofert bid but didn't pay for Unipetrol was 361m Euro (Kc11.5bn).
Buying Unipetrol would make sense for post-merger PKN Orlen/MOL, analysts said, as it would create a regional group better able to compete than the three smaller separate entities in existence today.
Press reports put the number of interested bidders at between six and ten, but National Property Fund (FNM) spokeswoman, Petra Krainova, said that the total so far had reached nine.
"This is more than I expected, so it's definitely positive news," said Roman Cenek, an analyst at Atlantik Financni Trhy.
Until recently, PKN Orlen had been the only company confirmed as expressing an interest. Apart form MOL and Slovak investment group Penta, no other company has confirmed its interest. There is apparently one other, as yet unnamed local financial group in the running. Representatives of ConocoPhillips, Yukos and TNK-BP were unavailable for comment. A member of the press office at Agip/ENI said that it was company policy not to comment on market or press speculation.
Austria's OMV and Russia's LUKoil have already ruled themselves out of the bidding. British firm Rotch, which bid highest in the first Unipetrol tender, is apparently undecided.
"It's fair to say that we're considering the possibility and we may take a view on this after we've seen the terms," said Rotch CEO, Keyvan Rahimian.
But sources at Rotch said the company would proceed with extreme caution after getting its fingers burned badly in the last tender when it won - but lost.
"It cost us about US$5m to bid the most - and then lose - so we want to be sure of the conditions this time before we get involved," said a source at the company. "We will look at the information memorandum when it comes from the government and we'll see. If there are any of the restrictive conditions that were included last time, I doubt we'll be interested."
After the damage caused by the massive floods (of August 2002) and the possibility of environmental damage at the Spolana chemical plant in Central Bohemia there were questions that would need to be answered before the company decided to proceed, the source said.
The first Unipetrol tender included protective conditions that restricted how the group could be broken up and limits on job losses. The Ministry of Industry and Trade has insisted that this time round, restrictive conditions will not be on the agenda. Bidders were originally given until December 20th, 2003 to register their interest, but this has been extended to January 12th, 2004. The tender should be concluded in March.
Cesky Telecom signs contract with bank consortium
The country's dominant fixed-line operator, Cesky Telecom (CT) recently signed a contract on a syndicated loan with a consortium of five banks, CT's spokesman, Vladan Crha, was quoted as saying by Interfax News Agency.
The consortium includes an Austria Creditanstalt, Citigroup, JP Moran, KBC/CSOB and SANPAOLO. Another 10 banks, including Komercni banka, Ceska sporitelna and Zivnostenska banka, will join the five lead arrangers, New Europe has reported.
The loan, worth a total of 850m Euro, will be used for the acquisition of the 49 per cent in the country's largest mobile phone operator, Eurotel. CT already owned 51 per cent of Eurotel. It's the biggest loan in post-communist central Europe.
The loan is split into three tranches, a 300m Euro one-year revolving loan, a 300m Euro five-year amortising, and a 250m Euro five-year revolving credit loan. "A portion of the latter loan will be available in Czech crowns," Crha said.
CT did not give details on the price of the loans. The firm said only that the "structure and terms of the loans provide for maximum flexibility in case of privatisation." Sources from the banks CT was dealing with, said earlier that the loans were to be priced at 20-40 bp above Euro rates.
CT agreed to buy the 49 per cent stake in Eurotel from the Atlantic West consortium (Verizon and AT&T) for US$1.05bn in June.
CT is 51 per cent controlled by the state. The government plans to sell its shares in CT by the end of 2005, although it has yet to decide whether Eurotel will be part of the deal. Eurotel has over four million clients. CT owns 99 per cent of the country's fixed lines and has 3.6 million clients.
Trucks may still face waits at border post-EU
Some companies and analysts have questioned whether the benefits of European Union entry will be significant in terms of faster transport times, the Prague Business Journal reported.
Although customs clearance procedures at all Czech borders will disappear (all Czech borders will be open to other EU members states after May 1st), a smaller number of customs officers will have greater powers to stop and search vehicles within the country and carry out other checks.
Added to that, police checks can still take place at borders because the Czech Republic will not be a member of the grouping of EU countries that have waived such checks at their borders - members of the so-called Schengen zone. The Czech Republic will not become part of the zone until 2006.
"The transport companies have concerns about how the free flow of goods will work," Martin Dokoupil, a partner with the market research agency INCOMA Consult, said. Some suppliers have complained they will have to wait for several hours at the border as they leave the Czech Republic. Sometimes the delays can drag on into days. Recently, trucks at the Rozvadov border crossing into Germany from west Bohemia faced a wait of seven hours, and trucks on the north Bohemian border with Poland at Nachod waited nine hours.
"We take it as a fact that there will not exactly be a free movement of goods," said Ladislav Cervenka, external affairs director with Unilever CR. "Checking food hygiene and safety will also be stricter," he added.
The Cabinet said it would lay off 2,344 out of 9,000 customs officers. About 80% of the layoffs will take effect before the end of 2004, and the rest in 2005. About 400 officers will be re-employed by other state institutions including the financial police.
A proposal approved by the Cabinet would also give customs officers a host of new responsibilities including surveillance of illegal employment of foreigners, checking whether cars have paid motorway fees, monitoring movement of radioactive substances and waste as well as bacteriological, biological and chemical weapons in the country. They will also monitor the trade and transport of historical and cultural objects.
The draft bill does not include the Ministry of Finance proposal that custom officers would also be able to impose fines for any of these offences.
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