This record is a partial extract of the original cable. The full text of the original cable is not available.

031234Z Jan 06

UNCLAS SECTION 01 OF 03 VIENNA 000006 
 
SIPDIS 
 
STATE FOR EUR/ERA AND EUR/AGS 
TREASURY FOR OASIA/ICB 
TREASURY PLEASE PASS TO OCC (ESIEGEL) AND FEDERAL RESERVE 
USDOC PLEASE PASS TO OITA 
USDOC FOR 4212/MAC/EUR/OWE/PDACHER 
PARIS ALSO FOR USOECD 
 
E.O. 12958: N/A 
TAGS: ECON EINV ECIN ETRD AU EUN
SUBJECT: Austria's Economic Footprint in Central Europe 
and the Balkans 
 
 
Summary 
------- 
 
¶1.  Austrian commercial interests continue to benefit 
greatly from intensified trade and investment relations 
with the countries of Central and Eastern Europe (CEE), 
as well as Southeastern European (SEE) nations.   Exports 
to CEE have more than doubled since 1995 and exports to 
SEE have quadrupled.  In 2004, more than 50% of Austrian 
Foreign Direct Investment (FDI) went to the region, and 
Austria was the largest foreign investor in Slovenia, 
Croatia, Bulgaria, Romania and Bosnia-Herzegovina. 
Austrian banks and insurance companies are particularly 
dominant in CEE and SEE, with 25% and 20% market shares 
respectively.  Other sectors, notably financial services, 
telecoms, and energy, also have active expansion 
strategies in the region.  Austria views its commercial 
presence in the Balkans as a contributing factor to 
economic growth and political stability in the region. 
During its EU Presidency the first half of 2006, Austria 
will promote increased contacts between the EU and Balkan 
nations, as well as accession for Romania and Bulgaria in 
¶2007.  End Summary. 
 
"Enlargement Bonus" for Austrian Economy 
---------------------------------------- 
 
¶2.  Austria's economic relations with the countries of 
Central and Eastern Europe (CEE) have soared since the 
opening of CEE markets in 1989.  Austrian business took 
advantage of opportunities in CEE at an early stage, with 
Austrian banks providing the financial underpinnings for 
significant export and FDI growth.  Economists estimate 
that new market opportunities in CEE stimulated an 
additional growth rate of 3.3% in Austria from 1989 to 
1997, and created approximately 60,000 new jobs.  The 
2004 accession of eight CEE countries to the EU 
accelerated Austria's eastward focus.  Austrian exporters 
benefited from dynamic import growth in the new EU member 
states, creating a "win-win-situation", according to the 
Vienna Institute for International Economic Studies 
(WIIW).  With only 2% of the EU's population, Austria has 
8% of EU-internal trade with the new CEE member states. 
Austria's competitiveness and productivity has improved 
due to the EU's eastward enlargement.  Extensive economic 
relations with CEE have also helped Austria to overcome 
sluggish demand from traditional export markets, 
especially Germany, in the Eurozone. 
 
Impressive Trade Growth in CEE and the Balkans 
--------------------------------------------- - 
 
¶3.  Austrian exports to CEE more than doubled from $5.3 
billion (10.4% of Austrian exports) in 1995 to $13.3 
billion (12.3% of exports) by the end of 2004.  In 
Southeastern Europe (SEE), exports have more than 
quadrupled from a low base of $935 million (1.9% of total 
exports) in 1995 to $4.3 billion (4.0%) in 2004.  In 
2004, seven of Austria's 17 most important export markets 
were located in CEE and SEE, headed by Hungary, the Czech 
Republic, Slovenia and Poland.  Equally impressive, 
Austrian imports from CEE rose from $3.7 billion (6.3% of 
Austrian imports) in 1995 to $11.5 billion (10.5% of 
imports) in 2004.  Imports from SEE increased from $370 
million (0.6% of total) in 1995 to $2.0 billion (1.9%) in 
¶2004. 
 
Thriving Austrian FDI 
--------------------- 
 
¶4.  In the past ten years, Austria's FDI has shifted 
markedly towards CEE and SEE.  In 2004, more than 50% of 
Austria's FDI went to CEE and SEE.  In 2004, Austria was 
the number one foreign investor in Slovenia (30% of all 
FDI flow into Slovenia), Croatia (23%), Bulgaria, Romania 
and Bosnia-Herzegovina.  Austria held the second position 
in Serbia-Montenegro, and third in Slovakia, Hungary and 
the Czech Republic.  Austrian FDI to the EU-15 has 
correspondingly dropped from 46% of total FDI in 1995 to 
34% in 2004. 
 
Austrian Banks and Insurance Dominant in CEE and SEE 
--------------------------------------------- ------- 
 
¶5.  Austrian banks have been active in CEE since the mid- 
1980s, spearheading Austrian FDI in those countries. 
Since 2000, Austrian banks have also moved aggressively 
into SEE markets, considered "an extended domestic 
market."  Western European banking groups control some 
70% of the CEE and SEE banking markets.  Austrian banks 
hold approximately 25% of the market, by far the largest 
portion, followed by Italian banks with half that share. 
In several countries in the region, Austrian banks' 
market share is more than 40%. 
 
¶6.  Six out of Austria's seven largest banks hold huge 
investments in CEE and SEE:  Bank Austria Creditanstalt 
(BA-CA), Erste Bank, Raiffeisen International (RI), 
BAWAG, Volksbanken (VAG), and Hypo Alpe-Adria Bank 
(HAAB).  Among the five largest foreign banking groups in 
the area, three are Austrian: (Erste Bank is number one, 
BA-CA number two, and RI number four).  Erste Bank 
overtook BA-CA as the largest bank in the region 
following its December 2005 acquisition of 62% of 
Romania's largest bank, Banca Comerciala Romana, for Euro 
3.75 billion. 
 
¶7.  Austrian insurance companies have about 60 CEE/SEE 
subsidiaries.  Since the low insurance density offered 
high growth potential, Austrian insurance companies also 
moved into these markets early.  Contrary to banking 
sector investment in the region, which is predominantly 
M&A, the insurance industry has concentrated on 
greenfield investments.  Austrian insurance companies 
hold a market share of 15-20% in CEE and SEE and earn 30% 
of their total premiums from operations in the region. 
 
Vienna Stock Exchange Expands in Region 
--------------------------------------- 
 
¶8.  In March 2005, an Austrian consortium, led by the 
Vienna Stock Exchange (VSE), acquired a majority share in 
the Budapest Stock Exchange (BSE).  This was an initial 
move in VSE's strategy to form a broader "Central 
European Stock Exchange" alliance, including the VSE, 
BSE, and stock exchanges in Warsaw, Prague, Bratislava, 
Ljubljana and Sofia.  The VSE's strategy complements the 
expansion of Austrian banks, insurance companies and 
other business into the new EU member states and other 
CEE and SEE countries. 
 
Energy, Telecommunications, and Infrastructure 
--------------------------------------------- 
 
¶9.  Austrian energy and telecom providers also hold 
sizable investments in CEE and SEE.  The Austrian energy 
provider EVN purchased two-thirds of the Bulgarian 
Government's "South-East" in November 2004.  The Austrian 
petroleum giant OMV's purchase of 51% in the Romania 
petroleum company PETROM in December 2004 for $1.8 
billion was the biggest Austrian FDI ever at that time. 
In July 2005 Telekom Austria took over the Bulgarian 
company Mobiltel for $1.9 billion, with plans to become 
the biggest telecom provider in SEE.  The Austrian 
Economic Chamber and the Vienna Economic Forum (VEF), a 
platform promoting investments in SEE, foresee continued 
investment opportunities, particularly in infrastructure. 
 
Austrian Airlines - CEE/SEE Network Carrier 
------------------------------------------- 
 
¶10.  The Austrian Airlines (AUA) group has positioned 
itself as a network carrier for CEE and SEE to support 
Austrian business in the region.  From its hub at the 
Vienna airport (VIE), AUA currently operates 461 flights 
weekly to 39 destinations in 23 CEE and SEE countries. 
In January 2005, AUA obtained a 62% share in Slovak 
Airlines (SA) as part of its CEE strategy.  In December 
2005, the Slovak Privatization Commission recommended the 
sale of the Bratislava and Kosice Airports for Euro 367 
million to a consortium led by VIE.  VIE has further 
signaled interest in obtaining shares in the Zagreb 
airport, once Croatian authorities privatize it. 
 
Opportunities. 
-------------- 
 
¶11.  There remains considerable potential for Austrian 
commercial expansion in CEE and SEE.  Aside from 
geographical proximity and historical ties, Austrian 
investors benefit from high growth prospects in the 
region.  There will continue to be a strong demand for 
banking products.  Moreover, for Austrian banks, which 
suffer from high costs and relatively low interest income 
in their domestic market, the CEE/SEE subsidiaries are 
cash cows, with CEE/SEE profits representing a large 
portion of operating income. 
 
.and Risks 
---------- 
 
¶12.  Eastward expansion also involves risks, including 
political instability, legal uncertainties, and 
corruption.  Some Austrian firms and banks are becoming 
increasingly dependent on growth and future developments 
in these markets.  The huge exposure of the Austrian 
banks' CEE/SEE subsidiaries entails additional risks: 
macroeconomic imbalances in the region, exchange rate 
volatility, credit risks, increasingly fierce 
competition, and necessary consolidation of the banking 
sector in CEE/SEE.  Providing banking supervision at 
Western European standards remains a challenge. 
 
Politics Follows Economics 
-------------------------- 
 
¶13.  Austrian banks are contributing to the 
stabilization of CEE/SEE financial systems.  This, in 
turn, helps foster market-oriented reforms and 
economic progress, as well as political stability. 
GoA representatives pointed out during a recent forum 
that Austria tries to define itself as a "focal point" 
for business with SEE and as a mediator to stabilize 
SEE politically.  Close commercial ties with SEE also 
explained the GoA's strong support for commencing EU 
membership negotiations with Croatia.  During its EU 
Presidency the first half of 2006, Austria will push 
for intensified contacts between the EU and the Balkan 
region.  Austrian Minister of Economy Martin 
Bartenstein recently confirmed Austria's strong 
interest in the EU accession of Romania and Bulgaria 
in 2007 and in closer EU relations with SEE, "the 
"European growth champion." 
 
KILNER