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Will the Ukraine invasion impact the FDI attractiveness of CEE countries?

CEE countries such as Estonia, Lithuania, Latvia and Poland have turned themselves into FDI hubs in recent years. Will the invasion of Ukraine dent that status?

By Ruth Strachan

The Russian invasion of Ukraine and the resulting horrors are likely to dominate global news reports for the foreseeable future. In the days after the act of aggression, retaliatory moves have seen the banning of Russian oil and the closing of various multinational enterprises in Russia, including McDonald’s and Starbucks, showing how global markets can shift rapidly in times of conflict.

What does this mean, then, for the economies of the central and eastern European (CEE) countries closest to the crisis and their investment strategies? Can the recent strong foreign direct investment (FDI) performances and the deep pools of tech talent in countries such as Latvia, Lithuania, Estonia and Poland retain the affections of investors while a war rages in the region?

Will Ukraine invasion impact FDI into eastern Europe?

Rolands Bogdanovs, managing director of the investment and tourism agency of Riga in Latvia, says: “Obviously, we do not know how it all will turn out and when it might end, but in the scenario that they [Ukraine and Russia] reach a ceasefire, without any further escalations and without any nuclear damage, it shouldn’t leave a long-lasting impact on the overall FDI flows in CEE.”

Bogdanovs goes on to explain that he believes economies without the protection of EU or Nato membership will be impacted more heavily due to uncertainty from investors.

Indeed, these memberships also provide some comfort to Joonas Vänto – the director of the Estonian Investment Agency – although he adds that circumstances will continue to be difficult for CEE countries. Vänto says that many supply and value chains have already been disrupted, which is causing uncertainty and concern among investors.

So how long will uncertainty regarding investment into the region last, and will there be lasting damage to the global reputations of countries in the CEE region? Jacek Levernes, honorary president at the Association of Business Service Leaders – an organisation representing business services in Poland – says: “Our experience with crisis situations… shows that there is always a natural slowdown in the investment decision-making process. It can last around three to six months, with investment usually picking up again after this period.”

Levernes agrees with the other CEE representatives that in this case the timeline remains largely unknown given the uncertainty over how long the unrest will continue.

Reducing dependence on Russia

Kotryna Tamoševičienė, who is the head of the macroeconomics and forecasting division of the Bank of Lithuania, explains that many CEE countries, Lithuania included, have been minimising their economic dependence on Russian for a long time.

These efforts include reducing the use of Russian gas and building FDI relationships with western Europe. Tamoševičienė highlights Germany and Scandinavia as key source markets for Lithuania.

“Lithuanian relations with Russia, and with all those Eastern markets, have reduced significantly since the previous Russian aggression [in Ukraine] in 2014,” she says. “So therefore, the effect on CEE markets and economy is expected to be rather moderate.”

This decoupling from Russia has been a long and slow process for these countries but one that should now cushion the economic blow of the invasion of Ukraine.

Estonia tells a similar story, where Vänto says: “The share of FDI from Russia to Estonia has been declining for a long time, accounting for approximately 3% of the total FDI to Estonia in 2021.”

Future optimism?

CEE countries have resilience, often built up through war-torn histories that have delivered robust economies in the 21st century. A key ingredient to that rebirth, however, has been optimism, something that is not lacking in this crisis.

“Lithuania is still a safe place to invest,” says Tamoševičienė. “There might even be some new opportunities in attracting investors, who have been previously investing in Russia.”

As CEE countries shelter Ukrainian refugees, Tamoševičienė highlights this as a potential opportunity, explaining that the Lithuanian economy grew at such a fast rate in 2021 that the country has experienced a labour shortage. With the caveat that the best possible outcome is that all displaced Ukrainians are able to return safely home, Tamoševičienė explains that these refugees would be assets to the talent pools of Lithuania and other CEE countries.

Ultimately, a measured approach to FDI in Estonia, Latvia, Lithuania and Poland is expected in the aftermath of the invasion of Ukraine. “It comes as no surprise that in any significantly challenging situation, major investors review their business continuity plans,” says Levernes. “The business community remains calm and still takes decisions with a long-term perspective.”

While the conflict continues, it remains to be seen what the greater impacts will be for CEE countries, and more importantly the many Ukrainian refugees they are sheltering. What Bogdanovs is sure of is that, irrespective of what happens in the CEE countries, it will take longer for Russia and Belarus to recover. “The aggressive and unpredictable nature of Russia and Belarus governments will certainly leave an impact on their ability to attract FDI for as long as it takes for their governments and the direction of their politics to change significantly,” he says.

Until then, the resilience and optimism that is baked into the CEE region will prove a crucial element as it looks to capitalise on the considerable FDI momentum it has built up over the past two decades.

More coverage of the Ukraine invasion from Investment Monitor:

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