Croatia at the crossroads


Croatia may enter the European Union as soon as 2012. Are Luxembourg companies ignoring the opportunities
to do business with the Adriatic nation?

With the Republic of Croatia set to become the 28th member of the European Union as early as 2012, the Luxembourg Chamber of Commerce recently organised its first ever economic mission to Zagreb, with the aim of boosting the Grand Duchy’s scant commercial ties with the Balkan nation. Luxembourg business participants were generally positive about the experience, the opportunities for the Grand Duchy, and Croatia’s economic outlook, but well aware that many obstacles remain on the road ahead.Like many countries, Croatia was hit hard by the global economic crisis: the Croatian National Bank reported GDP contraction of nearly six percent in 2009. However, the republic had average annual GDP growth of 4.4 percent from 2000 to 2008, welcomed more than 11.2 million tourists in 2008 alone, and is home to a robust shipbuilding industry, the Croatian Chamber of Economy reports. Despite such relatively strong economic performance, Croatia has not had a smooth path in its top economic goal: European integration.

One stumbling block has been a lingering border dispute with current EU member Slovenia. Since the breakup of Yugoslavia in 1991, the two countries have been at odds over the Bay of Piran, which is located on Croatia’s north-western border with Slovenia and is about 40 kilometres southwest of Trieste, Italy. Ljubljana’s objections meant Croatia’s accession negotiations – which began in 2005 – were delayed for several years. However, in a June 6 referendum, Slovenes voted to accept an internationally mediated agreement on the maritime border. That means Zagreb is now expected to complete membership talks with Brussels in the next year, with the possibility of accession coming the year after, if Slovenian cooperation continues.

It was in this more optimistic environment that the Luxembourg Chamber hosted informational seminars, company matchmaking sessions, and a reception attended by the Grand Duke of Luxembourg on June 10 in the Croatian capital. Despite being organised with only a couple weeks’ notice, more than a dozen Luxembourgish and 40 Croatian organisations participated, according to Pierre Gramegna, Director General of the Chamber. “This is the right time to get interested in the country. It’s the pre-accession phase, so there are a few EU funds available to foster trade. Once Croatia is inside the EU, trade will increase spectacularly. And it’s good to be in there in the early stage,” he says.

“Croatia is a very important market for us, because it’s one of the most potent economies of the former Yugoslavia,” states Georges Jentgen, Export Director at Saint-Gobain Abrasives, who is responsible for marketing for diamond tools and machinery to the construction industry in the Balkan region. The company has been operating in Croatia for more than ten years and is looking to expand its distributor network in the market. Jentgen explains that “there are a lot of business opportunities considering how much the EU is investing in credits” in the run-up to membership. “If people come to Croatia, they would be surprised how many construction signs saying ‘funded by the EU’ they’d see. In all the former Yugoslav countries, the hotel infrastructure was very bad. Construction of new hotels [in Croatia] is a booming market, and not as hard hit as Hungary, for instance, during the recent crisis.”

“I do believe that entry into Europe will give international companies more opportunities to develop business” in Croatia, states Clothilde Ludorf, Manager and Consultant at Ludorf Partner, which advises financial services organisations on electronic technologies. Her firm has consulted with banks and card services providers such as France’s Société Générale, Luxembourg’s Cetrel and MasterCard in Belgium. In Croatia it has been working with SplitskaBanka since 2007, helping the bank develop new e-commerce, point-of-sale and merchant rating systems.

Ludorf participated in the Chamber mission hoping to meet Croatian companies interested in expanding electronic payment networks in both their home market and those potentially planning to grow across Europe. “Good organisation, but unfortunately there were few participants at the presentations in the afternoon,” she reports on the event. Ludorf particularly praises the mission’s evening reception for its “relaxed atmosphere and where each of us was able to talk for five to ten minutes” about business opportunities between Croatia and Luxembourg. “It was also an opportunity to meet other Luxembourg companies active or interested in the Croatian market to investigate the possibilities of developing joint projects,” Ludorf adds.“It’s not a difficult market per se, because the rules are getting quite similar to the EU,” as part of the accession process, the Chamber’s Gramegna suggests. He says the Grand Duchy is well known in Croatia, since many EU investment funds transit through the European Investment Bank and Luxembourg’s investment in training and informational exchanges over the past decade have burnished its credentials.

Notable Challenges

However, the lack of familiarity in the rest of Europe is proving to be a notable challenge in attracting investment in Croatia. “Because of its political past, the former Yugoslavia was not well visited by Western Europeans,” Saint-Gobain’s Jentgen observes. “Today people are reluctant to speak about the former Yugoslavia, the Balkans. People are not aware that is it very safe to walk around in Croatia. Many people believe they can put their efforts in another place and business from Croatia will come some day when it’s ‘safer’ to go.”

“Croatia is unique in southeastern Europe, in that it combines almost all the geographic, urbanisation, climatic and industrial elements of other countries in the region,” states Alan Kuresevic, Vice President of Engineering at SES Astra, which has been active in the market for more than 15 years. The company hopes to add more Croatian TV channels to its direct-to-home satellite service and build up a new satellite broadband service in Croatia. “With the stable legislative and political situation, Croatia represents an almost natural entry point for investments in the region.”

“The questions all the time are the same: ‘Do you have credits ready?’” says Bernard Elvinger, Delegated Administrator of Agrilux, of his meetings with potential customers. The trader in material handling equipment is looking to build a new distributor network in the country, and indeed helps its customers prepare the necessary paperwork for financing purchases. Elvinger is cautiously optimistic about the economic climate: “You see here that some Croatians are very optimistic about becoming a member of the EU, some Croatians are very pessimistic. So you don’t know the reaction of business. But it is very active. There is a lot of activity, because clever people are not waiting for the end of the accession process.”Clothilde Ludorf is also positive but realistic about Croatia’s future prospects, saying it has nurtured a fairly “harmonious development of its economy, pushed by the growth of the domestic cons­um­ption. But this country shows clearly a lack of industry transformation and its trade balance is in deficit.” While Croatia attracts millions of tourists per year, she points out this figure is “limited during the summer season due to lack of infrastructure.” She concludes: “Bureaucracy is very heavy and complex, and preferably as a foreign company it is better to have a good local advisor. New opportunities for development are there, but you have to be patient and careful. Croatia has a very strong potential for the future, and all these handicaps or weaknesses should disappear progressively with the entry into Europe.”



Trade and Investment FiguresGOOD GROWTH

According to Statec, exports of goods from Luxembourg to Croatia totaled 4.9 million euros in 2009. The top three categories were metals and metal goods (3.7 million euros), machines and devices (426,000 euros), and textiles (432,000). Total exports were down sharply from 6.2 million euros in 2008, but up from 4.4 million euros in 2007 and 4.7 million in 2002.

Imports of goods from Croatia to Luxembourg in 2009 were 9.1 million euros. The largest trade by far was in machinery and devices (7.9 million euros), with stone, cement and glass work (871,000 euros) and various merchandise (152,000) rounding out the top three categories. Total imports were up substantially from 4.2 million euros in 2008, 3.3 million in 2009, and only 485,000 euros in 2000.

The OECD reports foreign direct investment of 24.2 million euros from Luxembourg to Croatia in 2008, up notably from 4.6 million euros in 2007 and 1.7 million in 2002. The Grand Duchy saw negative FDI flows from Croatia of -2.4 million euros in 2008, compared with -11.3 million in 2007, and positive FDI flows of 600,000 euros in 2002.