This is my presentation I made in Krakow in Akademia Polsko-Litewska. You can find slides here.

Lithuanians and Poles have common but still very medley history. We were friends and we were enemies, we defended each other from outside invaders and also killed each other without mercy, we crated a common state and made it fail as well. What is even more shocking, less than a hundred years ago we supported terrorists in each others territories and now we are allies in the war against terror.

Al these thing I’ve mentioned are so called “high-politics”, games elites play. They can hardly say anything about how Lithuanians and Poles feel about each other or how good we know each other. If we need to understand how close two peoples are, we have to look not at politics, but economics. Engagement in common economical activities is, I guess, the best way for common people to know each other. This presentation is my modest and provocative trying to diagnose current state of business relations between Lithuania and Poland.

Because I’m mostly interested in last year economic relations I’ll avoid topics such as ‘What were the trade relations in Rzeczpospolita’ or ‘Who taught who to drink: vodka production in Rzeczpospolita’ (I’m sure you all know that alcohol industry was one of the key economic sectors in both countries few centuries ago). I’ll also avoid economic numbers and statistics and, instead, concentrate on examples of not really successful business operations in neighborhood countries.

Let’s start with the best known example – ‘power bridge’ or “litpollink”. Although it’s not pure business project it still can show some symptoms. So what is the case? Lithuania had and still has excessive capacity in electricity generation while Poland lacks electric power in north-east region. It’s obvious, that this project could be useful from geo-energetic perspective and maybe profitable for both sides. Existence of this link could encourage both sides to negotiate construction of new Nuclear power plant in Lithuania a few year earlier and possibly could help to avoid current security issues connected with new nuclear facilities in Belarus and Kaliningrad district. How ever we still have no bridge and despite political declarations it’s not clear if we can expect it at all. So this project has FAILED.

But lets leave political issues and go to pure business.

Let’s start with ‘Kredyt Bank’ failure in Lithuania. ‘Kredyt Bank’ was the first foreign bank to open a branch in Lithuania in 1997. After couple of profitable years they felt in to losses and sold their activities for Nordea in 2002. They’ve failed, but what was the reason. It’s seems, that Kredyt Bank failed and in attracting local clients and in becoming gates for Polish companies to Lithuania or for Lithuanian to Poland.

The same year when ‘Kredyt Bank’ left Lithuania other Polish giant entered Lithuanian market. During first year of activity insurance group PZU bought several smaller insurance companies in Lithuania. First five years was a total failure for the company. In 2006 concern considered to sell Lithuanian branch (Ukrainian as well). Even now, when PZU became 3rd largest player in Lithuanian insurance market, theirs profit can hardly cover all investments made in the nearest future. So overall, PZU investments in Lithuanian has FAILED or to say in other words, their success was too expensive.

These examples from financial sector maybe are the best known, but not the only one. Lithuanian and polish finance markets are weakly connected. There are no financial institution (except PZU), who are important players in both markets. Even European or Global giants who are successful in Poland are almost non existent in Lithuania. It seems, that choosing Poland as starting position for Pan-Baltic expansion is doomed for failure.

The lasts example of poles in Lithuania I want to mention is ‘PKN Orlen’ investment in oil refinery ‘Mažeikių nafta’. Although this case can look very successful from political or geoenergetic perspective as a business project it is a total failure. 2.8 b USD “Orlen” paid for 84 % of shares in ‘Mažeikių nafta’ was far from clever price. If we look at the profit of ‘Mažeikių nafta’ in 2005 only, then the prices of 9 P/E’s can be treated as reasonable and equal to European average. But 2005 was extremely profitable for ‘Mažeikių nafta’ and hardly any analyst could expect, that this level can be sustainable. After ‘Orlen’ bought ‘Mažeikių nafta’ profit decreased significantly. Sum of three years (2006-2008) profit was only half of profit in 2005. Even more, this year ‘Orlen’ had to buy additional 10% of shares from Lithuanian government for slightly higher price than in 2006. Before starting to prepare this presentation, I’d talked with several financial analysts about failures of polish companies in Lithuania. ‘Orlen’ was the first example they all mentioned.

Now lets concentrate on Lithuanian companies in Poland.

“Čilija“ who runs the largest public nourishment network in Lithuania and Latvia started activities in Poland in 2006. They open 2 pizzerias in Warsaw in 2006 and closed in 2007. Ambitious company with target to become a largest and the most popular network in Europe owning more than 80 restaurants in Lithuania, Latvia, Estonia, Ukraine, Romania and Russia decide to leave Poland after year of activity. What was the reason? Maybe fast food culture in Poland or maybe failing to understand polish consumers. At least they admitted their failure quite soon.

Next example is ‘VP Group’ – largest business group in Lithuania owning retail chain ‘Maxima’, drug stores ‘Euro vaistinė’ (‘Euro Apteka’ in Poland), minority share in Leo LT, etc. This group was extremely successful in consolidating multi-line or drug retail sectors in Lithuania, Latvia, Estonia, Bulgaria, Czech Republic and Slovakia. ‘VP Group’ never tried to enter polish market with department stores ‘Maxima’, although retail consolidations in Poland started few years later, so they already had enough capital and experience to do that. In 2001 ‘Euro Apteka’ started aggressive expansion in Poland and in a few years (until 2006) they open 60 drugstores. However their aggressive strategy met strong opposition from local pharmacists. They accused ‘Euro Apteka’ of money laundering, started boycott campaign. VP still owns ‘Euro Apteka’ but plans of aggressive expansion have FAILED. Company still owns only 61 drugstore.

Last example is, I think, the most successful and largest investment in Poland made by Lithuanian business. But still it is worth to mention in the group of failures. I’m talking about “Jelfa”. ‘Sanitas’ bought ‘Jelfa’ in 2006 when its bid for Jelfa, a Polish pharmaceutical company, was declared the winner by Polish state authorities. This investment cannot be called real failure, but still they had lots of opportunities to do that. Privatization prices was a real war with competitors bidding to take over ‘Jelfa’ and labor unions seeking very straight agreements. Soon after privatization upraised scandal of spoilaged medicines (produced before ‘Sanitas’ took control of the company), what leaded to suspended production and huge losses. But despite all the lack of success and lots of trouble, this project hasn’t failed.

These examples of failures are just a small piece of big picture. However, I think, that they reveal main difficulties Poles find in Lithuania and Lithuanians in Poland. Neither Poles, nor Lithuanians are successful in understanding neighborhood market. Poles usual overpay for their investment in Lithuania, while Lithuanians face strong resistance from local competitors and unfriendly environment. What is really sad, despite all political declarations we still don’t have really successful example of business cooperation between Poland and Lithuania. I think this discourages other companies to cherish links between Lithuania and Poland and to create value for both societies.