Austrians Are Retaking the Balkans (extended)

Albania, Bulgaria, and Serbia aren't on many companies' maps, but to some in Vienna, they're gold mines

On a crisp fall day in central Belgrade, Boris Nemsic's Opel minivan passes a government building with windows blasted out by U.S. bombing in 1999 and never repaired, then the spot where an assassin gunned down reformist Prime Minister Zoran Djindjic in 2003. A few blocks later the driver deposits Nemsic, the chief executive of Telekom Austria Group, near the entrance to a pedestrian mall where an elderly woman is hawking packets of 500 billion dinar notes, worthless souvenirs of Serbia's hyperinflation in the early 1990s.

Such reminders of Serbia's recent history might give some investors pause, but Nemsic just chuckles. Like many other Austrian companies, Telekom Austria (TELA.F) has thrived in such post-Communist outposts. A decade ago, Vienna-based banks, telecom companies, and builders were among the first to invest in former Warsaw Pact countries such as the Czech Republic and Hungary. Now they're leading the way into Europe's riskiest region, the former Yugoslavia and Albania. While others wait to see whether the Balkans win entry to the European Union, the Austrians have already become the biggest foreign investors, sinking $7.8 billion into the region, or more than a quarter of the total. "Business is faster than politics," Nemsic likes to say.

As if to illustrate what he means, Nemsic steps from a bustling Belgrade street into one of the most recent Austrian investments. It's a sleek new retail outlet for vip, Telekom Austria's startup mobile-phone service in Serbia. Nokia (NOK) and Samsung handsets line shiny white walls decorated with vip's orange and maroon neo-psychedelic logo. "You don't find retail shops like this in Serbia," Nemsic boasts, as he chats with young employees and a photographer snaps pictures for an in-house magazine.

A Big Push East

Central Europeans joke that Austrian companies are retaking territory lost following the collapse of the Austro-Hungarian Empire in 1918. But it's not far from the truth. Vienna-based Erste Bank Group (ERST.F) and rival Raiffeisen International (RIBH.F) are the No. 2 and No.

3 banking groups in Central and Eastern Europe as measured by assets, ahead of giants such as France's Société Générale (SOGN.PA). Italy's UniCredit (CRDI.MI) is the No. 1 bank in the region, but only because it acquired assets originally assembled by Bank Austria Creditanstalt. In energy, Vienna-based OMV (OEMV.F) is Central Europe's largest oil and gas supplier, with $28 billion in sales. OMV's modern filling stations, complete with sit-down restaurants, are such a novelty in rural Bulgaria that people have staged weddings there.

In the fragmented telecommunications market, Telekom Austria's mobile subsidiary, Mobilkom Austria, is No. 1 in Bulgaria and a close second to Deutsche Telekom (DT) in Croatia. Investment in emerging Europe has allowed Telekom Austria to boost sales more than 20% since 2004, to $7.1 billion last year, even as the company's traditional phone service steadily lost customers in its home market. The East is highly lucrative for Telekom Austria, with operating margins as high as 58% in Bulgaria.

Now the Austrians are moving into the even riskier territory of the former Soviet Union. Raiffeisen became the biggest foreign-owned retail bank in Russia—albeit with only a 2% market share—after its 2006 acquisition of Impexbank. In October, Telekom Austria agreed to pay $1.6 billion for MDC, the second-largest mobile provider in Belarus, a swampy nation of 9.7 million ruled by strongman Alexandr Lukaschenko. The Austrian entrepreneurs are convinced they can deploy expertise gained in the past decade. "The further east you go, the more similar it is to the way it used to be in Central Europe," says Herbert Stepic, CEO of Raiffeisen, whose holdings include the largest bank in Albania.

Austria's Backyard

Staid Vienna, with its air of faded imperial grandeur, seems an unlikely breeding ground for adventure capitalism. But throughout the Cold War, Austria maintained surprisingly strong connections to the countries once controlled by its former empire. After the Berlin Wall fell in 1989, Eastern Europe provided an outlet for the pent-up ambitions of Viennese businesspeople. "Austria is too small for entrepreneurs," says Wolfgang Reithofer, CEO of Vienna-based Wienerberger (WBSV.F), whose foray into Hungary in 1990 was part of a drive that turned the company into the world's largest brickmaker.

Local knowledge often proves crucial. For example, after vip's launch in Serbia in July, managers noticed that customers were checking their account balances after almost every call, putting a big burden on central servers. Because of years of bad experience with the state telephone monopoly, customers wanted constant reassurance they weren't being overcharged. "We understood what was happening immediately," says Telekom Austria CEO Nemsic, a Croat who grew up in the Bosnian capital of Sarajevo and later became an Austrian citizen. Vip responded by boosting server capacity to offer faster online bill checking.

In retrospect, Austrian companies' investment in Central Europe seems like a no-brainer. But, as competitors have learned, it wasn't as easy as it looked, chiefly because of deadening government bureaucracies left over from Communist times. The Netherlands' KPN (KPN.AS) sold its stake in Cesky Telekom (TEF) at a loss in 2003, after problems working with the majority owner, the Czech government. The company was later bought by Telefonica.) "The Austrians know that region better than other people," concedes KPN CEO Ad Scheepbouwer. "It's been their backyard for hundreds of years."

Riskier Terrain

The Austrians also know how to take risks while also limiting their exposure. When Erste Bank bought state-owned financial institutions in countries such as the Czech Republic, it insisted on the right to give back problem loans that hadn't been properly disclosed. "We were prepared for bad surprises," says Erste Bank CEO Andreas Treichl. OMV explores new markets by opening filling stations, only later investing in heavier assets such as refining capacity.

The Austrians will need all their savvy as they push further east into the former Soviet Union. Even more than Central Europe a decade ago, countries such as Belarus and Moldova lack the basic features of a modern economy such as transparent legal systems or reliable corporate bookkeeping. Democratic institutions are shaky or nonexistent. Telekom Austria's Nemsic recalls visiting the Belarussian capital of Minsk recently and noticing the secret service headquarters with "KGB" displayed in large letters on the fa�ade. Quipped a Belarussian companion: "We kept the brand."

Austrians point out that these regions do have advantages not always found in emerging markets. The people are well-educated, and there are decent roads and electricity. Political risk? Nemsic maintains that European Union regulators can be more menacing than post-Communist functionaries. "Don't be worried about Belarus," he says. "Be worried about Brussels!"

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