Old partnerships between China and the former communist nations of Europe are being renewed for the 21st century. By Alice Gartland
“The history of central and eastern Europe since 1989 is a true success story of moving from a centrally steered economy to a market economy” says Andrzej Tokaj, a partner in the Warsaw office of Magnusson, a law firm with offices across the Baltic region.
“Even ash country is still dealing with historical burdens, the amount of growth and legal and commercial development is astounding” adds Vladimira Papirnik, managing partner of Squire Sanders & Dempsey’s Prague office.
There are echoes of China’s own economic development in such statements, and perhaps it is no surprise that Chinese investors are able to see the opportunities that central and eastern Europe – often abbreviated to CEE – present. Chinese companies are active across the region, investing in transport and logistics hubs in the Baltic states and solar power in Hungary, and building roads in Poland.
Chinese investors are “quick learners” and “take a long term view” says Bryan Jardine, a partner at Wolf Theiss in Bucharest. They are “not as strict about the bankability of certain projects,” says Laurentiu Pachiu, managing partner at Pachiu Associates, also in the Romanian capital.
The region is a gateway to the European Union and its single market.
And Chinese investment is, according to some lawyers, filling a void that has existed since the global financial crisis started in earnest in 2008. “Intra-Europe investment has slowed and Chinese investment has become more visible,” explains Alexandra Doytchinova, managing partner of Schoenherr’s Sofia office.
This article covers Hungary, Poland, the Czech Republic, Slovakia and the Baltic states (Estonia, Latvia and Lithuania), which all became members of the European Union in 2004, and Romania and Bulgaria which joined the EU in 2007.
Many international companies managing investments in the region view CEE as a single entity. “There are a large number of similarities [between the various countries] from the point of view of the foreign investor,” says Kamil Blažek, a partner and head of projects and infrastructure at Kinstellar’s Prague office. (Kinstellar traces its origins to the CEE offices of Linklaters which were spun off in 2008. The name Kinstellar is an anagram of Linklaters.)
Yet as the long list of countries suggests, the region is not a homogenous entity. There are “significant differences when it comes to culture, language, economic performance, market size and forecasts for the future,” says Tokaj. “While Latvia has suffered one of the deepest recessions in the world, with a decline in GDP of approximately 18% in 2009, Poland has reported positive growth for the same year,” adds Tokaj by way of illustration.
“In the context of any serious business proposal, close attention should be paid to specific factors in each particular country,” explains Richard Lock, head of the corporate practice at Lakatos Köves and Partners in Budapest. “Competition for foreign investment is a constant issue within the region.” Investment incentives, tax policies, social security and labour costs vary dramatically from country to country. This can be to the advantage of inward investors, who can play one country off against another.
“If the planned investment is large enough, then countries will court the investor aggressively, not only with incentives but also with the more mundane matters, such as smoothing the way for quick visas and bureaucratic approvals,” says Papirnik.
China and the CEE are very different places, and there can be significant cultural and linguistic barriers to overcome. Hungarian, for one, is a language often ranked alongside Chinese in difficulty.
Doytchinova says that the language barrier is not an issue because Chinese clients and local people can communicate in English. Pachiu has also found the cultural divide not to be as great as one may first assume. The Chinese teams leading an investment are, “often schooled in America and can understand the Western system,” he says.
However, the importance of good quality translation should not be underestimated, according to Bartek Swietlik, head of the China desk at Gessel in Warsaw. Swietlik points to Gessel’s close relationship with TransAsia Lawyers as key to ensuring the production of quality documentation in both languages. This is particularly so when following formalistic procedures required when bidding for public procurement projects.
One might also assume that Chinese investors’ understanding of state-controlled economies would lead them to be sensitive to the bureaucratic legacy of the region’s communist past. This is certainly the experience of Papirnik, who observes that Chinese investors “understand where we came from” and so it’s easier for them “to relate to some of the processes and constraints” that remain in the Czech system.
“Certain inherent bureaucratic tendencies inherited from [a country’s] communist past can prove difficult for an inward investor, but not insurmountable,” says Pav Younis, a partner at Weinhold Legal in Prague.
Business strategy, political will
The growing ties between China and CEE countries have spurred the growth of business associations and governmental organizations aimed at promoting trade and investment between the two sides.
The Hungarian government sent a delegation to China this year, and the Lithuanian government recently played host to a delegation from China. In each case, both sides wanted to demonstrate their commitment to building trade.
Lenka Hrebícková, director of China and Southeast Asia operations at CzechInvest, says that attracting investment from China is a priority and it is essential to “get to know what Chinese partners need, the type of services they prefer”. CzechInvest, the Czech government’s investment and business development agency, has offices in Hong Kong and Shanghai and provides information to Chinese investors about setting up in the Czech Republic, including identifying potential business partners.
In Poland, SINOPOL is a private organization that works to develop links between Chinese and Polish businesses. And in June this year VARUL became the first Baltic law firm to join the Chinese European Legal Association (CELA). CELA is a non-profit organization which was founded in 2008 to support and foster intercultural legal exchange between China and Europe and to promote alternative dispute resolution CELA also set up the China European Arbitration Centre in Hamburg in 2008.
Besides trade promotion organizations, law firms are reaching out to develop effective working relationships with PRC firms. Magnusson sent an associate on secondment to V&T Law Firm in Beijing for six months, and as mentioned above, Gessel has developed a close relationship with TransAsia. Firms able to offer services in jurisdictions across central and eastern Europe may be particularly attractive to Chinese investors, who are often seeking to manage a portfolio of investments across the region. “Being a regional firm is a real advantage in terms of providing the coverage that Chinese investors need,” says Jardine at Wolf Theiss.