Transparency and Business Risks in Eastern Europe

The continuing erosion of press freedom in Central and Eastern Europe should raise alarms among business leaders that operate in the region. Growing media consolidation, autocratic critiques of journalism and prosecutions against reporters are all undermining the ability of observers to get solid business intelligence. In the absence of a free press, political risk is rising in these European markets.


The recent sentencing of current Deutsche Welle journalist Pelin Ünker in Turkey is the latest in a line of attacks on press freedom in Central and Eastern Europe, which could significantly chill foreign direct investment in these countries. The undermining of transparency and accountability in Turkey, the Visegrád Group (Poland, Hungary, the Czech Republic and Slovakia), Romania and Bulgaria presents dramatically increased political risk to foreign investors in these countries. The consolidation of media control under entrenched political leadership throughout much of the region indicates that public procurement corruption in these countries is likely to increase in the next few years due to decreasing public scrutiny and more limited investigative journalism.


Backsliding on transparency in Turkey and Hungary


Ms. Ünker’s case is the latest in a long line of disturbing attacks on the press in President Erdogan’s Turkey. Her articles for Turkish paper Cumhuriyet on the revelations of the Panama Papers about then-Prime Minister Yildirim led to her prosecution and recent sentence of over a year in prison for defamation, even though the allegations she raised against Yildirim were not disputed.  Although she will appeal the sentence, the dramatic decline in the rule of law in Turkey does not bode well for her chances for a fair hearing. Freedom House has saddled Turkey as ‘not free’ for the first time in their 2018 Freedom of the World Report, and marked the nation as having the single largest drop in their freedom index among all the world’s nations over the last decade.


However, Turkey is not the only country to see a decline in the rule of law and transparency over the last few years. According to Transparency International, of the Visegrád Group only Poland cracks the top 40 countries ranking for transparency, and that is after they had dropped 5 spots since the 2015 ranking. In that same time period, Hungary has dropped a shocking sixteen spots down to a ranking of 66th in the world, in large part due to the machinations of Viktor Orbán and his Fidesz party to muzzle dissenting press and foreign NGOs that operate in the country.




How transparency impacts business risks


For foreign firms, this lack of transparency makes it significantly more difficult to accurately gather and act on business intelligence. Even government statistics and central bank information can be susceptible to manipulation in these countries as investigative journalism and independent media are squeezed out of the market. Press freedom is at risk in these countries, and journalist themselves are often facing legal consequences or worse, for covering news stories that are too close to government interests.


The murder of investigative journalist Ján Kuciak and his girlfriend in Slovakia in February 2018 brought these issues to the fore. In the wake of their murder, international organizations such as Reporters without Borders and the Organized Crime and Corruption Reporting Project, as well as numerous international newspapers, exposed how press consolidation and government control in Central Europe may be exacerbating problems of corruption, fostering closer ties between political leaders and organized crime.


Conducting business activities in such an environment of deteriorating press freedom and increasing corruption, foreign firms risk not only a substantial gap in business intelligence, but also the likelihood that they might become targets of unchecked authoritarian regimes, as they look for foreign scapegoats to justify government policies and performance. Slowing growth forecast in Turkey and the EU makes it probable that Central and Eastern European political leaders will face growing pressure from voters. As often seen in modern Russia, the popular strategy to avoid discussions on economic issues is to agitate the public against ‘foreign agents and interests.’ This is a tactic that Viktor Orbán has already used in his attacks against George Soros and the Open University, and which Poland’s press has used to attack American journalist and writer Anne Applebaum.


Romania and Bulgaria are facing similar challenges – declining press freedom, media consolidation, and worsening corruption as national political leaders and party supporters seize control of media sources. Reporters Without Borders recently noted that Romania’s press is ‘in free fall’, and that a number of major media group owners have either been indicted for corruption or fled the country to avoid potential prosecution. Bulgaria fares even more poorly, ranking last among EU nations in press freedom. Not surprisingly, Bulgaria also ranks lowest among the EU nations in the Transparency International report on corruption. The lack of press freedom goes hand-in-hand with corruption issues.


Moody’s Investors Services recently highlighted ‘rising political risks’ as an overall risk to Eurozone growth, and the World Bank is projecting slower growth for Turkey, as well as in Central Europe in 2020. Poland continues to forecast above the rest of the Visegrád group until 2021-2, but eventually drops as well. This economic deflation will increase pressure in these countries to redirect voter attention to other issues, and the last few years of nationalist and populist rhetoric are likely indicators of their future strategies. In the absence of a free press, robust investigative journalism and open national dialogue, foreign investors will be facing substantially higher political risk costs. Foreign direct investment, especially from companies who are concerned about corruption issues tarnishing their business activities, will likely redirect to safer havens in other EU nations in the mid-to-long term horizon.



Credit: WSJ, WorldBank.com, Fox Business


© De Angelis & Associates 2020. All Rights Reserved.

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