## Wednesday, February 20, 2013 ... /////

### The Balkans aren't ready for investments

Bulgarian government collapsed due to Czech-controlled electricity

ČEZ, the Czech Power Group, is Central Europe's largest listed company with market capitalization exceeding $17 billion. Its 70% remains state-owned but the rest is large enough so that it's one of the two main movers of the Prague Stock Exchange. Anyone trading stocks in Prague probably has some stocks of ČEZ. The price is now just slightly above CZK 600. Three power companies share the Bulgarian grid. ČEZ and Energo-Pro have headquarters in Czechia (the latter also does business in Georgia, Armenia, Turkey), EVN is Austrian. All three operators became targets of silly protests. It's running the healthy Czech grid and six nuclear reactors as well as many coal plants, a significant part of one of Europe's most overbloated (and irrationally located) collections of photovoltaics, and many other things. In Czechia, consumers pay about$0.30 per kWh of electricity. Owners of solar panels sell their energy for a guaranteed $0.60 per kWh or so. Remarkably enough, the consumers pay just$0.10 per kWh in Bulgaria.

And they're still complaining.

The protests were so intense that the Bulgarian government collapsed today. The Bulgarian salaries are smallest in the EU nominally and 2nd smallest after Romania if quantified on the PPP basis. Depending on which counting you choose, the cost of energy per average salary is lower or higher than in the Czech Republic. In other words, it's pretty much the same.

Their electricity is just amazingly cheap for us – something like that is possible because labor is apparently an important part of the electricity price and/or Bulgaria so far avoids ludicrously overpriced forms of energy such as the "renewable" ones.

For many years, I was thinking that the business of ČEZ in Bulgaria and other countries of the Balkans was just doing fine and these skillful folks are doing similar things that the traditional Western European companies are doing in Czechia. However, in recent months, this belief was shattered. The license for ČEZ was revoked in Albania and similar problems occurred in Bosnia and – pretty much today – in Bulgaria.

The Czech government seems to be nearly silent in its lukewarm defense of a major Czech, mostly state-owned company. I agree with President Klaus that if Czechia started proceedings to terminate the license of a Western investor, lines full of bitter ambassadors and other bullies would be immediately standing in front of our government buildings.

I have no clue what's the profit margin of ČEZ in Bulgaria but it clearly needs some profit margin for its business to be economically sustainable and to cover various risks – whose reality is damn real, as we saw today. What I find crazy is the Bulgarian folks' belief that the electricity price "should" be [some random number they invent and find convenient] even though they're unable to actually produce any electricity for that price.

Whether there is a contract with ČEZ that ČEZ meticulously obeys (they claim and they're the more credible side as far as I can say) is irrelevant for the Bulgarians – they're ready to breach it at any moment because they clearly think that there are much more important things than treaties, the rule of law, credibility, and the invisible hand of the markets in business. They still mentally live in some kind of socialism. That's true for Bulgaria, Bosnia, Albania, Greece, and most other countries in the Balkans, too.

There are many wrong, socialist habits and memes in Czechia, too. And the Czechs also love to complain about everything. They're almost never satisfied. However, the silver lining is that all these complaints are just "formalities" that everyone considers futile. At the end, Czechs quickly surrender – something we're good at after a constructive approval of superior powers such as the Third Reich and USSR on our territory. ;-/ So when a bank or a telephone operator imposes some fees on you or anything of the sort, the Czechs just accept it at the end. They still know how to buy discounted goods – up to 50% of certain categories of products are being bought for discounted prices here: Czechs are really "elite" in this art – however, when something is just imposed by the other side and there's no way to escape, the Czech consumer just accepts it. This tendency of Czechs to accept fees, higher prices, and so on is a major factor behind the resiliency of the Czech banking sector and other things.

One simply can choose neither products that don't exist nor products that do exist for prices that no one offers. ;-) I am afraid that the previous self-evident insight isn't quite understood in the Balkans where people must believe that prices may be determined or should be determined by wishful thinking, a magical guesswork involving numbers, or by street protests. The concept that a government may "revoke" a contract with a foreign company because it's more scared by some violent imbeciles on the street is somewhat scary. It's the communist approach in its homicidal, Che Guevara-like form.

If someone is thinking about investments in the Balkans, I recommend him or her to think twice. They're not real emerging markets yet. Instead, use the money to buy some weapons – including a compact pile of nukes – to protect yourself against possible threats by the volatile inhabitants of the troubled peninsula. Let me just explicitly remove Slovenia from this description of the Balkans - it's a totally standard Western European country these days – and suggest that both Croatia and maybe even Serbia may be better in these respects. So far, ČEZ faces no foul tricks in Romania, either, but I have my worries about that place, too.

#### snail feedback (4) :

Never ask what is wrong with me. Always ask what is wrong with *other* people - in this case, Bulgarians, of course...

Dear Alexander, I have never asked what's wrong with the Bulgarians and I didn't have to because the answer is obvious.

Moreover, your sentence "what is wrong with me" is completely nonsensical in this context because I, as a completely impartial observer, have nothing to do with either side of this confrontation. I am neither ČEZ nor its director or its major stockholder, for that matter.

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