High-profile exits illustrate how Croatia must do more to court FDI

As tobacco titan British American Tobacco (BAT) deliberates whether or not to withdraw from Croatia, the country faces the very real prospect of losing its single biggest foreign investor over the last five years. BAT first threatened to relocate its operations in September, after a dispute arose over the Croatian government’s decision to place a high excise duty on certain tobacco products.

The prospect of losing BAT as a foreign investor is piling pressure onto Croatian finance minister Zdravko Marić, given the fact that BAT generates significant budget revenue – something that’s in short supply at the moment due to the Covid-19 crisis. Indeed, BAT’s potential departure over reported concerns regarding the business environment in the EU’s newest member state only emphasizes how Zagreb has fallen short on courting foreign direct investment (FDI) since acceding to the EU.

In a country plagued by misguided populist moves, accusations of corruption and hamstrung by the pandemic’s debilitating effect on its tourism industry, financial support in the form of FDI is vital to the recovery of the economy. With that in mind, the government must do more to attract—and retain— investment from overseas to keep economic engines humming.

Undermining investor confidence

BAT first acquired interests in Croatia in 2015, buying out the Central European market leaders TDR and signing a five-year deal to retain operations in the country. In that time, they have invested a total of €620 million into the business, comprising 20% of Croatia’s total FDI and generating over €60 million towards Croatian GDP. That such a big investor may follow in the footsteps of German dairy group Meggle spells is a massive headache for Marić, especially given that the European Commission (EC) has already predicted that the EU’s newest member state will suffer a 9.6% downturn in 2020.

The lost revenue is concerning enough, but the decision to withdraw by major investors like Meggle (and potentially BAT) is indicative of a wider perception among of Croatia as a place inconducive to conducting business. On some occasions, the Croatian government has taken controversial measures that have severely undermined foreign investors’ confidence. In particular, the Social Democrat-led government caused untold damage in 2015 by instituting a law which forcibly converted all Swiss-franc denominated loans into euros, meaning that Croatian banks – 90% of which are owned by parent companies from elsewhere in the EU – took a €1 billion hit.

Croatian politicians have themselves admitted that the measure was poorly thought out and “implemented in a populist manner”—the loans conversion was passed shortly before November 2015 parliamentary elections, padding the wallets of Croatians who had seen their debt burden increase in step with the Swiss franc. Unsurprisingly, the forced loans conversion drew condemnation from European institutions (the EC subsequently asked Croatia to reconsider its decision, while the European Central Bank raised questions over whether it was compatible with European law) and prompted a flurry of legal actions, with Hungarian bank OTP joining a lengthy list of claimants last month. Perhaps most concerningly of all, the decision to implement the law retroactively has dampened enthusiasm from overseas investors, given that it sets a precedent that Croatia’s business climate may be unpredictable and unreliable.

Corruption across the board

As well as concerns over the ease of doing business, Croatia also suffers from a torrid reputation when it comes to corruption. The arrest of ex-Prime Minister Ivo Sanader in 2010 was supposed to signal a turnaround in Croatian attitudes towards graft and helped seal its accession to the EU three years later, but Sanader saw his sentence overturned by the country’s constitutional court in 2015. To date, he has only been convicted on the smallest of the charges against him, while similar prosecutions against other members of the government have been labored and inconclusive.

In one of the more striking examples,  finance minister Marić himself was implicated in a scandal involving his former employers Agrokor. The now-defunct agribusiness conglomerate received a €48.3 million loan from the Croatian Bank for Reconstruction and Development (HBOR) in 2016, despite the fact that documentation has suggested Marić was aware of the company’s financial difficulties and hid that knowledge from the public. Meanwhile, Agrokor’s erstwhile owner Ivica Todorić was recently acquitted of defrauding the company to the tune of €1.25 million, though he remains under investigation for siphoning off a total of €133.3 billion from Agrokor coffers. Whether those investigations will bear any fruit remains extremely unlikely, especially as long as people like Zagreb mayor Milan Bandić, who has a dozen indictments against his name, remain in power.

To add insult to injury, the government was rocked by a fresh scandal last month when it emerged that multiple ministers from the incumbent government, including President Zoran Milanović, were regular attendees at an illicit speakeasy during the height of coronavirus lockdown restrictions. Little wonder, then, that Transparency International has seen fit to award Croatia a lowly rating of 47/100 in its Corruption Perceptions Index (CPI), its lowest score in five years.

BAT a barometer of FDI outlook

With the Croatian government seemingly fighting off new controversies every month and its upper echelons dogged by allegations of corruption and cronyism, it’s hardly a surprise that companies like Meggle and BAT are taking their business elsewhere. Meggle was very clear in stating that they only took the decision to withdraw from the country once it became clear that business conditions were unlikely to improve in the foreseeable future and, despite the brouhaha over excise duty, it’s almost certain that a similar concern is foremost in the minds of BAT decision-makers.

Marić and his fellow ministers remain optimistic that they can convince BAT to stay, but the possibility of losing their biggest overseas investor should spark a broader reckoning of the current business climate in Croatia. Only by committing to the ideals of equality, transparency and integrity and rooting out corruption wherever it rears its head will the EU’s newest member restore confidence among foreign investors, attracting and retaining more of the overseas capital that is so crucial to Croatia’s ongoing prosperity.



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