Will the invasion of Ukraine have an influence on CEE countries’ FDI attractiveness?

For the foreseeable future, the Russian invasion of Ukraine and the ensuing horrors are likely to dominate world news broadcasts. Retaliatory measures have included the banning of Russian oil and the closure of several international firms in Russia, like McDonald’s and Starbucks, in the days following the act of aggression, demonstrating how global markets can shift quickly in times of crisis.

What does this entail for the economies and investment policies of the Central and Eastern European (CEE) countries most affected by the crisis? Will recent great foreign direct investment (FDI) performances and large pools of IT talent in nations like Latvia, Lithuania, Estonia, and Poland be enough to keep investors interested while a regional war rages?

Will the invasion of Ukraine have an influence on FDI into Eastern Europe?

“Obviously, we don’t know how it will all turn out and when it might end,” Rolands Bogdanovs, managing director of Riga’s investment and tourism agency, says. “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 say that he believes economies that are not protected by EU or Nato membership will be hit more by investor uncertainty.

Indeed, these memberships bring some comfort to Joonas Vänto, the director of the Estonian Investment Agency, albeit he adds that the situation for CEE nations would remain difficult. Many supply and value chains, according to Vänto, have already been disrupted, creating investors uncertainty and fear.

So, how long will there be uncertainty about investment in the region, and will there be long-term damage to the CEE countries’ worldwide reputations? “Our experience with crisis situations… demonstrates that there is always a natural slowdown in the investment decision-making process,” says Jacek Levernes, honorary president of the Association of Business Service Leaders, a Polish organization that represents business services. It can last anywhere from three to six months, with investment often rising up after that.”

Given the uncertainty about how long the disturbance will last, Levernes agrees with the other CEE members that the timescale in this case is mostly unknown.

Reduced reliance on Russia

Many CEE nations, including Lithuania, have been reducing their economic dependency on Russian for a long time, according to Kotryna Tamoeviien, the head of the Bank of Lithuania’s macroeconomics and forecasting section.

Reduced use of Russian gas and the development of FDI links with Western Europe are among these attempts. Germany and Scandinavia are important source markets for Lithuania, according to Tamoeviien.

“Since the previous Russian intervention [in Ukraine] in 2014, Lithuanian relations with Russia, and all those Eastern markets, have deteriorated dramatically,” she argues. “As a result, the impact on CEE markets and economies is projected to be rather mild.”

For these countries, decoupling from Russia has been a long and slow process, but one that should now mitigate the economic impact of the invasion of Ukraine.

In Estonia, according to Vänto, “the share of FDI from Russia to Estonia has been dropping for a long time, amounting for around 3% of total FDI to Estonia in 2021.”

Optimism for the future?

CEE countries have shown perseverance in the face of adversity, which has resulted in strong economy in the twenty-first century. However, optimism has been a vital component of that rebirth, which is something that is in short supply in current crisis.

“Investing in Lithuania is still a secure bet,” Tamoeviien argues. “There may even be some fresh prospects in luring investors who have previously invested in Russia,” says the expert.

Because CEE nations are hosting Ukrainian refugees, Tamoeviien sees this as a possible opportunity, pointing out that the Lithuanian economy grew at such a rapid rate in 2021 that the country faced a labor shortage. Tamoeviien explains that these refugees would be valuable assets to Lithuania’s and other CEE nations’ talent pools, with the caveat that the greatest possible outcome is for all displaced Ukrainians to be able to return safely home.

Following the invasion of Ukraine, Estonia, Latvia, Lithuania, and Poland are expected to take a cautious approach to FDI. “It’s no surprise that major investors examine their business continuity plans in any seriously challenging situation,” adds Levernes. “The business community maintains its composure and continues to make long-term decisions.”

While the crisis continues, it is unclear what the long-term consequences will be for CEE nations, particularly for the many Ukrainian refugees they are hosting. What Bogdanovs is certain of is that, regardless of what happens in the CEE nations, Russia and Belarus will take longer to recover. “The aggressive and unpredictable nature of the Russian and Belarusian governments will undoubtedly have an influence on their capacity to attract FDI for as long as their governments and political direction remain unchanged,” he argues.

Until then, the CEE region’s perseverance and optimism will be important in capitalizing on the significant FDI momentum it has built up over the last two decades.