Nicholas Watson in Prague -

In its latest survey of foreign direct investment (FDI) in Central and Eastern Europe, the Vienna Institute for International Economic Studies found that the regional distribution of such investment changed markedly during 2006, with a greater share of new money flowing into the more easterly states at expense of the countries that joined the EU in 2004. First-quarter data suggest that trend is continuing.

The survey, released Tuesday, found that the share of regional FDI into the NMS-8 (new member states that joined the EU in 2004) fell to 36% in 2006 compared with 50% in 2005, while Southeast Europe registered a share of 27% and the European CIS 36% – the latter two shares being significantly larger than in the previous year.

"The shift of new FDI to the East and the Southeast reflects the emergence of new investment opportunities rather than a declining interest in the NMS-8," the Institute said. "The FDI inflow into the NMS-8 was marginally lower in 2006 than in the preceding years – declines in some of the countries were compensated by increases in others.

It said the decline of FDI in three of the NMS – the Czech Republic, Hungary and Estonia – was to be predicted, given that the 2005 peak was to a large extent driven by privatization. In another three countries – Poland, Latvia and Lithuania – the FDI inflow reached an all-time high; it also surged in Slovakia.

The Institute noted that FDI is booming in the EU's most-recent members of Bulgaria and Romania, with inflows reaching historic highs in 2006 of €4.1bn and €9.1bn, respectively

"This is partially due to privatization, but also to new investment projects in financial services, trade and real estate," the Institute said, adding that EU membership is a stability anchor for foreign investors attracted by improving business conditions and soaring consumption.

Southeast European countries in the Western Balkans received two times more FDI in 2006 than the year before. Large privatization projects attracted especially large amounts of FDI to Croatia, Montenegro and Serbia, while Albania and Bosnia-Herzegovina lagged behind somewhat.

The European CIS region's high 2006 FDI inflow was solely due to Russia where, according to the balance of payments statistics, FDI more than doubled to €23bn - although there are grounds to believe that this figure is overstated, the report noted.

Eastward, ho!

Going forward, the Institute reckons that almost certainly Bulgaria and Romania, as well as some of the other Southeast European countries, won't see the same levels of FDI as 2006, while Poland could buck the regional trend and strengthen its position.

Indeed, first-quarter data suggest this eastward trend (ex-Poland and probably also Slovakia) is continuing.

On June 1, the director of the Romanian Agency for Foreign Investment (ARIS), Florin Vasilescu, told Rompres that in the first quarter FDI fell 33% from the year before to €1.31bn. For the full year, Vasilescu predicts FDI will be around €7.0bn – still robust but lower than last year's €9.1bn. Likewise, FDI into Latvia in the first three months of this year reached €288.4m, down 7.9% from the same period last year.

However, further east the picture is much more positive. FDI into Montenegro in the first quarter rose 193% on year to €195.4m; Belarus enjoyed a 180% in crase in FDI in January-March to €920m, the Statistics Ministry told Prime Tass.

In May, Russia's Federal State Statistical Service (RosStat) reported that FDI into Russia in the first quarter totalled $9.8bn, 2.5 times greater than in the first quarter of 2006. Of this amount, $7.5bn consisted of credits extended to Russian subsidiaries by their parent companies and another $2.0bn represented injections to basic capital.

"The data provided by RosStat show a sharp year-on-year increase in FDI in the first quarter of 2007 after only a very modest rate of growth in all of 2006," notes Charles Movit, an analyst with the consultancy Global Insight. "However, the bulk of the incoming FDI in January-March 2007 was directed to existing subsidiaries of foreign corporations active in fuel extraction in Russia."

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