Putin's war against Ukraine has brought Central and Eastern Europe back into global focus. Firms operating in both countries faced operational shutdowns and are even considering exiting the markets - if it hasn't already been done. Trade with Ukraine and Russia has plummeted.

Uncertainty about the escalation of the war, a possible expansion of the conflict to EU countries, and halted energy supplies to Europe are affecting the attractiveness of the region. In addition, huge inflationary pressures, supply chain disruptions and a shortage of skilled workers are putting pressure on companies. How are multinationals dealing with this complexity of challenges? Debates within companies and with various stakeholders tend to be controversial and good solutions difficult to implement.

The organizers and moderators Manfred Berger, Arnold Schuh and Christian Schierer introduced the panelists and led the discussion rounds, which revolved around the following questions:

• What is the impact of the war in Ukraine and the sanctions against Russia on the economies and markets in the region?

• How are European multinationals operating in the region affected and how are they responding to this multitude of challenges?

• What is the outlook for the CEE region? What are the plans for the reconstruction of Ukraine?

The following speakers participated:

• Arnold Schuh, Director, Competence Center for Emerging Markets & CEE

• Gunter Deuber, Head of Research, Raiffeisen Bank International

• Christian Mandl, Head of the EU Policy Department, WKO

• Tobias Schediwy, Commercial Director CEE/Consumer Panels & Services, GfK

• Andrey Yekimov, Managing Director Consumer Brands Romania/Bulgaria, Henkel Group

• Gábor Márta, Managing Director of Rail Cargo Logistics, Rail Cargo Group

• Krzysztof Soszyński, Vice-President of the Board, Inter Cars S.A., Poland

• Herbert Krutina, Division Manager SEE, Member of the Board, STRABAG AG

• Thomas Matejka, CFO of Raiffeisen Bank Ukraine

• Valerie Breitenfeld, Deputy Austrian Trade Commissioner in Poland

• Gerd Bommer, Austrian Trade Commissioner in Romania

• Olga Trofymova, President of the Ukrainian Association of Management Consultants

Christian Schierer, Regional Director - Western, Northern, Central & Southern Europe, Advantage Austria, welcomed the guests and pointed out the high importance of the CEE economic area for Austrian foreign trade and direct investments. The Grow East Congress plays an important role by focusing once a year on the activities and management challenges of multinational and local companies in CEE.

High energy prices threaten competitiveness of manufacturing industry

In his introductory speech, Arnold Schuh, Director at the Competence Center for Emerging Markets & CEE at WU Vienna, compared the current complex crisis situation triggered by Putin's war against Ukraine with the global financial crisis (2008-09) and the Covid-19 pandemic (2020). He showed that CEE countries were hit harder than the EU in all three crises. In the case of the pandemic, it was not the economic collapse, but the particularly high mortality figures. Thirteen of the world's top 15 countries with documented deaths per million population were from the region. The war in Ukraine and the sanctions imposed by the West on Russia have brought not only human suffering and destruction in Ukraine, but also losses of markets, sources of supply, and assets in Ukraine, Russia, and Belarus. Established trade relations and energy supply networks have been disrupted. Supply bottlenecks as well as enormous price increases for gas, oil and other commodities were the result. Companies operating in Russia face the dilemma of continuing to do business or withdrawing. The biggest threats to companies at present are the high and highly volatile energy and raw material prices, general inflation, supply shortages, geopolitical conflicts and labor shortages.

According to Schuh, the current crisis has ruthlessly highlighted the immense dependence in energy and commodity supplies on Russia and, in part, Ukraine. The war and the associated sanctions and Russian countermeasures are severely affecting the competitiveness of the German industry and that of Central Europe, which are both based on cheap energy. With gas prices five times higher than in the USA, there is a risk of factory closures and the exodus of production and new investments. Schuh points to the high importance of industry to the overall economy in Central Europe: countries such as the Czech Republic (23% of GDP), Slovenia (21%), Slovakia, and Hungary (19%) have experienced re-industrialization in the last 20 years (compared to Germany 18%, Austria 17%, and France and the UK 9% each). Another finding is that geopolitics needs to be considered more in internationalization decisions. The management of multinational companies must pay more attention to the economic and political conditions and characteristics of countries and regions, owed to the increasing regionalization of the world economy. In order to match the growing importance of politics vis-à-vis business, companies must increasingly turn to political strategies in order to be able to assess the effects of political decisions on corporate activities and to respond to them.

"The Big Picture": Stagflation next year and structural inflation

Gunter Deuber, Chief Economist of Raiffeisen Bank International, was pessimistic about the near future. The economic outlook for the economic region of Central and Eastern Europe is markedly clouded by the Russian invasion of Ukraine. He expected GDP to decline from 5.4% to 1% from 2021 to 2023 in Central Europe, from 7.4% to 2.3% in Southeastern Europe, and from 4.5% to -3.4% in Eastern Europe. This downturn feels more severe because it occurred from a particularly high level in early 2022. According to Deuber, stagflation is likely next year. Due to the geographic proximity to the warring parties Ukraine, Russia and Belarus, the neighboring countries in Central and Eastern Europe are particularly affected. Here, stronger dependencies on Russian oil and gas as well as the loss of food supplies from Ukraine have a particular impact on inflation. Among the ten EU countries with the highest inflation rate in September, nine were from CEE: the three Baltic countries led the inflation ranking with 22-24%, followed by Hungary (20.7%) and the Czech Republic (17.8%). The EU average was 10.9%. According to Deuber, this structural inflation will accompany CEE for longer. A "new iron curtain" in the EU's economic relations with Russia is inevitable, as sanctions and counter-sanctions will remain in place.

Christian Mandl, Head of EU Policy Department at the Austrian Federal Economic Chamber, pointed to EU measures to address the energy crisis. The replenishment of gas storage to 92% and targets to reduce gas and electricity consumption have already led to a curbing of Russian gas imports from 40% to 9%. Crisis-related softening of EU state aid rules to allow member states to relieve companies from exorbitant increases in gas and electricity prices, as well as initiatives such as the EU Hydrogen Strategy, the EU Green Deal, and REPowerEU & RRF, are intended to reduce dependence on Russian gas and oil and drive a general rebalancing to renewable energy sources.

Tobias Schediwy, Commercial Director CEE/Consumer Panels & Services at market research company GfK, dealt with the change in consumer behavior in CEE. Consumer sentiment is at a new record low in Europe, lower than in the 2020 pandemic. 40% of CEE households are experiencing financial difficulties, especially high inflation is causing them problems. Households are responding by saving energy, reducing out-of-home consumption and buying cheaper products. 62% more consumers than before are now comparing prices, 56% more are looking or waiting for sales, and 48% more are trying to keep the total amount down when shopping. Discounters and private labels are among the winners in all countries.

Multinationals focus on pricing, cost savings and supply security

Among the multinationals represented, all of which have a dominant or strong presence in the CEE region, the current crisis response revolves around two key issues: Pricing policy and security of supply. Huge price increases in energy, raw materials, packaging and transportation services are the biggest challenges at Henkel Group, a leading global technology and consumer goods company, as Andrey Yekimov, the General Manager Consumer Brands Romania, pointed out. Price increases are being implemented to absorb the unexpected cost increases - but this is leading to a decline in sales volumes. On the cost side, efforts are being made to counteract this with greater cost discipline and efficiency improvements in the supply chain and in procurement. Product innovations are another leverage point. New formulas for Rex laundry detergent and Somat dishwashing detergent, which allow cleaning with cold water instead of hot water, make it possible to save energy and thus cut costs.

Construction group STRABAG is a Europe-focused company (90% of sales) that generates 25% of its EUR 16 billion in CEE and is No. 1 or No.2 in markets such as Romania, Poland, the Czech Republic and Hungary. Due to the Russian invasion of Ukraine, STRABAG withdrew from Russia after 30 years of development and presence. Although painful, there was no alternative, according to Herbert Krutina, Division Head SEE and Member of the STRABAG AG Executive Board. STRABAG is also focusing on cost management and an appropriate price calculation. Enormous price increases for gas, electricity, fuel and bitumen are putting a strain on the profitability of ongoing projects and making it difficult to calculate new projects. Price escalation clauses play an essential role in mitigating unpredictable price increases, as do timely sourcing of materials, focusing on short-term projects, and using "back-to-back" clauses with subcontractors.

Ten of the fifteen markets in which Rail Cargo Goup is directly active belong to CEE. Rail Cargo Group is ÖBB's freight transport division and generated EUR 1.9 billion in sales in 2021 with nearly 6,000 employees. The war in Ukraine, high energy prices, and the renovation of tracks in Hungary and Serbia were and still are the main challenges this year as Gábor Márta, Managing Director of Rail Cargo Logistics, explained. The Eurasian connection, i.e. the continental transport routes between China and Europe through Russia and Ukraine, which is a central pillar in Rail Cargo Group's strategy, was disrupted by the war in Ukraine. In turn, new transport routes had to be found for grain exports from Ukraine, as shipping through the Black Sea was stopped or restricted. While Rail Cargo Group did not export grain from Ukraine before the war, this year it will already transport one million tons through a new route via Záhony in Hungary. The cooperation with the Austrian company GrainLane was quite helpful in this initiative. GrainLane has opened a digital platform for agricultural transport that connects farmers in Ukraine with traders, customers and forwarders and has been well received. This shows how quickly the transport and logistics industry is responding to the situation with new routes. The Romanian port of Constanta as well as the Adriatic ports of Riejka, Koper and Trieste are recording strong gains in freight volumes.

Krzysztof Soszyński, Vice-President of the Board, Inter Cars S.A., represented a regional player from Poland at the congress. Inter Cars S.A., listed on the Warsaw Stock Exchange, operates in 18 countries and, with sales of EUR 2.7 billion, is the leading automotive aftermarket retailer in Poland and in CEE. Inter Cars increased sales by 25% in Q3 2022 compared to the same quarter last year. The difficult economic situation is beneficial for the industry, as the purchase of new cars is postponed, increasing the demand for spare parts. Soszyński expects that the crisis will lead to consolidation in the industry and smaller dealerships will close down. After the outbreak of the war, Inter Cars stopped sales in Ukraine to protect its employees. On April 1, the Russian army destroyed the warehouse near Kyiv, which had been built at a cost of EUR 30 million. Soszyński assured that as soon as the war is over, Inter Cars will continue operations in Ukraine.

Romania and EU funds as bright spots

Romania is experiencing a boom like in the 2000s with economic growth of 4.5% this year and 2.3% in 2023, according to Austrian Trade Commissioner Gerd Bommer. Romania will benefit from the EU funding program 2021-2027 with up to EUR 100 billion. The IT sector in particular is a success story - Bommer expects an increase from 8% to 12% of GDP in the next years. There is also a surge in planned investments in the renewable energy sector due to its high potential and financial incentives. An exciting topic in the current environment is the start of gas production in the Black Sea in which OMV’s subsidiary Petrom plays a central role. Increased Ukrainian exports via Romanian land routes and the Black Sea port of Constanta are also generating increasing revenues and investments.

Valerie Breitenfeld, Deputy Austrian Trade Commissioner in Poland, highlighted in her speech the sectors with good growth prospects in Poland: green economy, energy transition, digitalization, reconstruction of Ukraine and re- & nearshoring.

Companies in Ukraine in constant crisis mode

Thomas Matejka, CFO of Raiffeisen Bank Ukraine, and Olga Trofymova, President of the Ukrainian Association of Management Consultants, provided insight into the incredible efforts of local companies to keep operations running. The crisis management of Raiffeisen Bank Ukraine has first of all taken care of the safety of the employees, of whom about 10% have fled abroad and 40% to Western Ukraine. There is financial support, provision of transport and training to enable them to work in new jobs, e.g. in the bank's call centers. Diesel-powered generators have been purchased to secure the power supply, and satellite links have been set up to move critical infrastructure and support into the cloud. As the Russian attacks subsided, business processes were stabilized and planning for the future began. However, they are now back in acute crisis mode due to the latest widespread Russian missile attacks on power plants and network infrastructure.

Olga Trofymova appeared in her capacity as both President of the Ukrainian Association of Management Consultants (CMC) and Head of the Ukrainian Automotive & Mobility Cluster. She presented Ukrainian entrepreneurs from various industries who, despite the adverse circumstances, are maintaining operations and looking for new sales opportunities. Destroyed plants are being rebuilt or relocated to Western Ukraine, the Ukrainian army is being supplied with products from their own production (e.g. medical, orthopedic products). The patriotism and motivation of the employees is impressive. Shift operations are set up according to the availability of electricity. CMC supports the companies in crisis management and reorientation. The Ukrainian Automotive & Mobility Cluster was founded together with international partners (among others Leoni, Kostal, SEBN, Ukrainian-German Chamber of Commerce) and includes 2,000 companies. These companies are trying to connect with Western European clusters via partnerships and reposition themselves.

Growing east is currently difficult

In summary, it must be admitted that the 13^th Grow East Congress did not quite live up to the congress motto this time. The outlook for economic development in the coming year is gloomy, with stagflation looming. Companies are currently mainly concerned with pricing policy, cost management and supply security. Co-organizer Manfred Berger, ICONIC Consulting & Neusicht Think Tank, emphasized that companies are now required to manage short-term challenges and long-term orientation at the same time, i.e. even in acute crisis management, the strategic perspective should not be forgotten. And the company examples have shown, Berger said, that innovations have become a core element in crisis management. The congress showed that even in this crisis, various countries and industries have opportunities for growth.

One ray of hope is the EU's EUR 810 billion Next Generation and RRF funds, which are designed to make member countries greener, more digital and more resilient to crises, thus also providing important funding to the EUCEE-11 countries. Nevertheless, it is clear that only the end of the war in Ukraine can lead to a normalization of trade and investment relations. Neighboring countries will be winners here in reconstruction, because Western European companies can hardly compete with the current low project prices for construction contracts in Ukraine.

The Grow East Congress is a project initiated and organized by Prof. Arnold Schuh, Director of the Competence Center for Emerging Markets & CEE at WU Vienna, and Dr. Manfred Berger, Partner of ICONIC Consulting & the Founder of Neusicht Think Tank. The Aussenwirtschaft Austria/Advantage Austria, the international arm of the WKO (Austrian Federal Economic Chamber), is our Congress partner.

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Contact:
Ass.Prof. Dr. Arnold Schuh
Director, Competence Center for Emerging Markets & CEE, WU Vienna
arnold.schuh@wu.ac.at

Dr. Manfred F. Berger
IQONIC Consulting
office@berger-m.at