Hungary must not been seen as model for Central Eastern Europe, says the Austria’s bank guru

Herbert_StepicRaiffeisen will stay in Hungary, but will focus on a smaller number of customers until the present politics continue in the country. In his interview to, Herbert Stepic – former chief executive of Raiffeisen International and current senior advisor of its management board – dissuades the governments of the better performing neighboring countries from following Viktor Orbán.

The Eurasia expert  and philanthropist (after whom the CEE Charity organization was named) says that the European Union made a huge mistake against Russia, Ukraine, and the other ex-Soviet states and contributed to the dramatic escalation of the situation. According to him, the only way out of the crisis is to establish a custom union between the EU and most of the former Soviet Republics, which later might become the basis of a pan European economic area.
He is convinced that the euro will significantly weaken – against the dollar – this year.

Zentai Péter:  Raiffeisen International’s planned withdrawal from Hungary did not happen: like the other Austrian and foreign banks, Raiffeisen is also staying in the country. Why?    

Herbert Stepic: The decision makers of Raiffeisen Bank International have examined a potential sale of its units in Hungary. After a thorough analysis, they decided that the conditions are not meeting the expectations and took the sale off the agenda. The environment, however, remains very uncertain; RBI will focus on doing more business with large, multi-national corporations and high net-worth individuals.
As long the bank tax as is not lowered or abolished, it represents a huge burden for the bank and heavily impacts its profitability. The bank tax, which is about 1 percent of total assets, is incredibly high. Apart from that, I do not wish to comment on potential plans of competitors of Raiffeisen Bank International regarding Hungary.

What do you think about the political, economic, and financial climate in Hungary?

It has to be expected that Mr. Orbán will continue his economic policy – a sustained “re-nationalization” of all economical domains and an unfriendly business climate for multinational companies related to it.  This heterogeneous development in Hungary over the last years – such as the reversal in the pension system in 2012, the bank levies, and the special taxes – is highly dangerous for the whole Central and Eastern European region. Mr. Orbán must not be seen as a model for the future economic policy of other CEE countries. Although the “re-nationalization” might be easier to be executed in the short-term, the structural market reforms paired with privatizations and infrastructure investments are the only promising success factors in the long-term. The austerity policies and the shaky economic recovery in the developed world will push all CEE governments to look for new ways of stimulating economic growth and addressing structural policy problems in foreseeable future.

What about the other Visegrad countries and Romania?

The other members of the Visegrád Group (Poland, Czech Republic, and Slovakia) have achieved to become integral parts of the economic area of the EU early. I consider this as a critical advantage, for which they can be credited. The economic policy of these countries was very clever: the low labor costs keep their national economies competitive. After a contraction of 1.3 percent in the last year, the estimated growth of Czech Republic is 2.3 percent this year. Slovakia has grown by 2.2 percent, Poland by 3.1 percent. These countries undertook a structural adjustment and benefited from it economically.
Romania stands out from the South-East European countries by its market size and growth potential. It is better equipped for the future than other countries in Central and Eastern European region. Its budget deficit complies with the Maastricht criteria, the government debt is also relatively low that it should not be a problem to refinance it, the current account deficit is low, the ministry of finance disposes of a high liquidity buffer, the foreign reserves of the central bank are very high, and IMF payment obligations can be covered easily. Despite the usual problems in emerging markets, Romania is very well positioned.

What is your opinion about the new “cold war”? Is it a cold war at all? What do you think about the Western sanctions against?

The current constellation of Russia-Ukraine and EU should not have escalated to this point. Ukraine‘s transformational process has already been hold back for ten years due to the Kuchma era. The EU support – not necessarily on a monetary basis – should have been offered during the Orange Revolution. Also the misguided Eastern Partnership contributed to this situation policy as it is was not adapted to the needs of the respective partner country.

The biggest mistake was that they did not include Russia in the combined development of the “common neighborhood“. Putin already proclaimed his desire for a strong and influential Russia at his inauguration; the idea that Ukraine might become part of the EU and/or NATO is unacceptable for him. Furthermore, Russia is a very important and wealthy trade partner. Ukraine has found itself stuck between a rock and a hard place because of the EU’s disregard of Russian interests.

The interdependencies between the EU and Russia are too high to allow the situation to escalate. Personally, I am against sanctions. The EU states are the largest importers of the Russian oil and gas (over 50 percent in 2012). In the short-term, there are no viable infrastructure alternatives. As the Russian imports of machinery and equipment have risen steadily in the last years, countries like Germany would be hit severely by import bans. There would be no winner in this commercial war. On the other hand, for Ukraine, there is no the medium-term export alternative. Russia is still the most important buyer of the low-quality Ukrainian technology.

The annexation of the Crimea was and will be a special situation – comprehensible from a Russian perspective, but not acceptable. What could be a possible and realistic outcome? Any solution with an autonomous Ukraine in its center can only be achieved together with Russia. The preferred option for the future would be a quasi-customs union, including Ukraine and other ex-Soviet states.

A parallel integration of other states of the Eastern Partnership further integration of Eurasia – from Lisbon to Vladivostok – would be the basis for a pan European economic area and become part of the new strategy of the Eastern Partnership. At the same time, the rivalry with Russia could be renounced and the Partnership for Modernization could be renewed. Ukraine would receive the necessary stability and provide the new administration with the adequate time to gradually implement an autonomous Ukraine, with the support of the EU and Russia.

Like in other developed Western European countries (Sweden, Finland, the Netherlands), anti-EU forces gather strength in Austria, too. What is going to happen?

Far right parties across Europe try to win as many votes as possible from people who are fed up with the EU’s crisis management. Although there are differences between the extreme parties, they have one thing in common:  they declare the EU as their enemy.
The huge increase in the number of demagogic and xenophobic parties could jeopardize the EU’s achievements and values in terms of fundamental rights and freedoms, stability, and equality. This is extremely dangerous for the EU as there no alternative in this highly competitive and globalized world.

Which side are you on in the inflation/deflation debate?

Every recession and many financial crises have a disinflationary effect, which means that inflation rates are lowered. Currently, we see the same effect in the euro area. Deflation (negative inflation rate), however, is only visible in countries severely hit by the crisis (Greece in particular). For the euro area, the total inflation is quite low (around +0.5 percent) but not negative. Much of this is the effect of low(er) energy prices (coupled with a strong Euro). Due to the economic recovery, the risk of deflation is very low for the whole Eurozone, while inflation should move back to around 1 percent over the year.

Is the euro too strong, for instance, versus the dollar?

In fact, the current exchange rate is not desirable because a stronger euro lowers the inflation rate and hinders the economic recovery in the euro area. Therefore, it is not surprising that the ECB openly warned that it would further ease its monetary policy (and thus weaken the Euro against the USD), if it significantly appreciates. This is why we do not expect the EUR/USD to go above 1.40, but to drop below 1.35 this year.