Radu Magdin, Contributor
Consultant și analist de risc politic, CEO Smartlink, fost Policy Manager la Google Bruxelles
#InvestorResilience: Guidance for ever more Resilient Investors in CEE’s 2019
This article is the first in a monthly series dedicated to Investor Resilience, first and foremost in Central and Eastern Europe, but also looking periodically at the global risk management sphere. It is dedicated to solutions to the challenges international business operators face in complicated (geo)political environments. Momentum is here, 2019 will be a year full of elections in CEE: first, there will be European elections in all members states, which could function as referendums on the incumbents, validating their governing styles or hinting at people’s desire for change. Secondly, other national elections have the potential to redraw the electoral contours of the region: presidential tests in Romania, Latvia, Slovakia, and Lithuania, parliamentary elections in Poland and Estonia. The Eastern Partnership countries will experience their own moments of electoral excitement, with local and legislative elections scheduled in Moldova and parliamentary and presidential polls in Ukraine.
However, more important than the organisation of the elections per se is the overall mood in region. I dare say that one could read more in the regional mood than in a cold interpretation of whom has the greatest chances to win in each of the above-mentioned races And, to put it simply, the political and public mood should be a serious source of concern for multinational companies (MNCs) operating in CEE. Despite recent years of full speed economic growth, austerity has been a game changer and has left an indelible mark on people’s mind. This is coupled with the highly skewed distribution of the economic benefits even after the EU integration; as could be seen for example in Romania, inequality remains very high and this has only given credence to those who argue not only that capitalism does not work for all, but that a stronger redistribution policy, distinguishing between insiders and outsiders, should be adopted by governments. Moreover, CEE is generally more conservative than its Western counterpart and the refugee crisis and the Syrian quota debate has only made the cleavage more salient (and has offered a good opportunity for political leaders in Hungary and Poland to flex their muscles, align with the vast majority of their population, and collect the electoral benefits).
We saw not only an East-West divide (which is becoming normalised as a new reality), but also a backlash in the CEE societies against the progressive segments within these societies (the alleged Soros “sold-outs”). Populist and nationalist instincts by incompetent or power hungry Presidents, PMs, or shadowy rulers of the country not being able to become themselves Prime Ministers or Presidents, are helped by the natural instinct of each maturing society to feel more confident in itself. To put it short, and blunt, populists play the patriotic card, finding periodically enemies abroad, hinting to foreign billionaires, MNCs, or good-for-bashing Brussels as the guilty for any problems at home. And it mostly works, at least for a part of the population, who is ready to blame their problems on a foreign factor.
The conventional wisdom is that, in the long-term, CEE has a big demographic problem and is vulnerable, based on still limited innovation capabilities, to automation and offshoring. Therefore, political leaders should act wisely and avoid creating unnecessary tensions with international capital, which could easily find opportunities somewhere else. At the same time, while playing nationalist, they should actually do something for their local entrepreneurs, not just use patriotic mantras. Otherwise, legitimate entrepreneurial frustration will come knocking at the door. Prosperity is linked to (social and political) stability, security and (legislative, including fiscal) predictability, and while the region is under the NATO, mostly-US, umbrella, in most of its member States, geopolitical flirts with America’s clearly declared strategic competitors can be seen in several capitals. However, this interpretation works in two broad scenarios: first, if someone assumes that political leaders will act in the short-term by weighting heavily the future; this is not the case since, from their position of strategic actors, they are rather opting for discounting and betting on the “here and now”. Politics is mostly about tactics now, though periodically we talk strategy. Second, if the international context is not factored in: we are on the verge of a global trade war, with President Trump suggesting that the tariff game with China will escalate. The international capital has the upper hand and could benefit from CEE structural problems (ageing population, migration, loss of the low-wage competitive advantage) in an open world. But as populism is more and more part of the global equation, things become more complicated for transnational capital. Obviously, it remains for these emerging tendencies to be confirmed in the years to come, but the signal is there and it is not noise. And history shows big money can always be easily demonised.
Additionally, CEE political leaders have no qualms in banking on the public mood. This will be even more likely as CEE consolidates its newly acquired status of a battleground state in great power competition. Bold players are on the move: with the Chinese willing to fund big infrastructure projects and with Turkey betting on PPPs (see the case of Romania), the strings that come attached to the EU funding will be less constraining and avoidable (at what costs, that is another – and big – issues). Orban is leading the regional push against the “imperialist” West and, in a speech a few weeks ago, denounced the attempts to bully Hungary, Poland and Romania. Italy is very likely to join the club in going against the mainstream EU orthodoxy. Reprimanding the East will become a hard job: Germany’s CDU/CSU is weakened by recent electoral results and rather inward-looking, searching for a replacement for Merkel, while Macron is ambushed by disgruntled French voters at home while trying to remain solar abroad. All in all, the radicalisation of the political mainstream could be ignored by big business in CEE only at their own expense. What is likely to come is neither pleasant nor profitable: the politics of blame in all its splendour and scapegoating. I can’t find a specific medicine? It’s not my fault as government, it’s the multinational. I pay too much for the energy bill? It’s that liberalisation calendar pushed by those companies and easy-to-bash Brussels. And so on. This comes at a time when the general reaction in the EU is a strong pushback against unfair business practices, fiscal optimisation, and tax dodging. The alliance between self-interested politicians the vocal left-behinds will mean, potentially, more responsiveness and less responsibility in Central and Eastern Europe.
How should MNCs factor in these tendencies into their local / national and regional game plan? I would put forward some general advice (a tailored opinion needs to be decided on a case by case basis): act carefully, monitor media and social media, understand social and political trends, engage with stakeholders across the political aisle, collaborate closely with those in power even if you have to hold your nose (in tough times, engage with power while feeding the opposition), and work more on anticipating attacks. Do invest more in civil society and independent media, since political channels will play their moguls music against you anytime, in case there is a political green light. So, your job is similar to the one of defusing a bomb, but it’s not mission impossible. As the global economy slows down, the consequences will be felt also in this region. After years of insufficient public investment and increase in spending without building up state capacity (take big time economic growth in Romania for example), many of these countries are not ready to deal with worsening economic conditions, whenever these will, sooner of later, come. The challenge for the years to come in an unhinged political East is to establish a true preventive connection with the consumers-as-voters – it is not about becoming more political, but about truly understanding politics and the current brewing semi-populist, semi-nationalist or patriotic cycle in the region. For business, there has been no better time for acquiring political expertise in this part of Europe, remember investor resilience is just one brief away.
Radu Magdin is a risk manager and communications consultant, former Prime Ministerial advisor in Romania and Moldova