Wild East is too wild for Polish business

By bne IntelliNews March 6, 2015

Jan Cienski in Warsaw -

 

For years Polish business has looked east to Ukraine as a promising market, seeing there similar characteristics to Poland's “Wild East” period of the early 1990s, when there was chaos on the market, but where fortunes were made for those able to predict that within a few years Poland would become a normal Western European country.

Ukraine had well-trained workers who were even cheaper than Poles, a large domestic market and tight trade links with Russia which allowed for exports to that significantly larger country. Enthusiasm for Ukraine saw Polish banks like PKO BP and Getin invest in Ukraine, while production companies like Nowy Styl, a furniture maker, and Sniezka, a paint company, set up factories in Ukraine. The Warsaw Stock Exchange invested time and money luring Ukrainian companies to list on the WSE, providing a cheaper alternative to the larger bourses of western Europe but one with similar standards of probity.

However, that gamble has not paid off. Battered by war against Russian-backed separatists,and facing an economic collapse, Ukraine in no way resembles the primitive but promising Polish market of 25 years ago.

The WSE set up an index of Ukrainian companies in 2010. But since that optimistic time, the index has lost 72% of its value; it has dropped by 21.6% in the last year alone. In comparison, the exchange's blue chip WIG30 index lost only 1.9% over the last year.

Nowy Styl has complained about the difficulty of using its Ukrainian factory, located in Kharkiv, just a few kilometres from the Russian border, to export three quarters of its production to Russia. Instead, it is instead investing in a new factory in Russia to serve that market. Sniezka reported that its net profit was down by 14% last year, with a large part of that due to problems in Ukraine, where the company's sales fell by 41% when calculated in hryvnias. Witold Wasko, the company's deputy president, tells the Dziennik Gazeta Prawna newspaper that he expects 2015 to be even tougher for Sniezka in Ukraine.

In all, Polish companies lost PLN120mn (€29mn) in Ukraine last year.

Faced with problems in the east, Polish companies are starting to hunt for more promising markets elsewhere. Polish farmers are already making the switch. Hurt by the collapse in the value of the hryvnia and by Russia imposing sanctions on significant swathes of EU agricultural production, Polish food exporters have successfully reoriented towards other developing markets.

The embargo saw Polish food exports to Russia fall by 14% last year, with further falls expected in 2015. However, food exports to Africa, the Middle East and Asia have soared. Pork exports to Hong Kong are up by 114%, according to the Rzeczpospolita newspaper, while overall food sales to Africa, largely wheat and grains, almost doubled. That means despite the problems in Russia, Polish food exports last year were up by 4.5%, breaking €21bn for the first time.

With a predicted recession in Russia this year of about 3% of GDP and a Ukrainian downturn ranging from 5.5% to as much as 11.9%, all combined with what is likely to be continued fighting in the east of the country, the prospects of Polish business returning to the east are remote.

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