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European Trade Conference Covers Wide Range of Issues
Odon Kiraly, Hungary Trade Representative

European Trade Conference Covers Wide Range of Issues

Experts report on U.S.-Hungarian trade, Russia's power plays in oil, the Central European film industry, and EU trade policy.

"The Hungarian MOL Oil and Gas Company was already 10% owned by Russians through a shadow company in Budapest, which came as a surprise to the directors."

Hungary hopes to emulate Ireland's leap from the bottom to the top of the development ladder. Russia is shifting its international weight from military pressure to its vast oil reserves to achieve its global objectives. Who are the top players in world film distribution? And what should the United States expect from the expanded European Union's now highly centralized trade structure? A group of experts and professionals in the field took up these issues in a conference at the UCLA Faculty Center March 11. The gathering was cosponsored by the UCLA Centers for European and Eurasian Studies and for International Business Education and Research as well as the Goethe Institut of Los Angeles and the Southern California Consortium for International Studies.

Professor Ivan Berend, director of the Center for European and Eurasian Studies, opened the conference with remarks on the eight Central European and Baltic countries among the ten new member states that joined the European Union in May 2004: the Czech Republic, Hungary, Poland, Slovakia, and Slovenia in Central Europe and the Baltic states of Estonia, Latvia, and Lithuania.
Of these new members, Berend said, "Hungary has now the highest rate of investment by multinational companies, equal to that in Ireland, producing 70% of Hungary's industrial output and 70% of exports. Multinationals really transformed the Hungarian economy."

These states, he said, have weathered the traumatic transition from communism. "After the collapse of state socialism in 1989 -- in some countries in 1991 -- a sharp economic decline followed," Berend said. "They had to compete with the most advanced countries in their own market, a painful process, for three or four years, when the GDP declined by 25%. Agriculture declined by 50% for three or four years. As a general trend one can say that between 1993 and 2000 a process of recovery began. Those countries that became members of the EU in 2004 had practically recovered from the sharp decline, reached the precollapse level. Of course, even if they reached a precollapse level they lost a whole decade."

The thing to watch, Berend said, was not the absolute level of these new EU members but their more rapid growth rate. The average annual growth for industry for the eight was 5.4% in the first half of the recent decade and the GDP growth overall was 4.3%. During the same period the original 15 were growing at 2.2% annual GDP.

Odon Kiraly: Hungary, an Economy on the Rise

Odon Kiraly, trade commissioner at the Hungarian consulate in Los Angeles, offered an overview of his country's current economic performance. In the early 1990s, he said, Hungary began a process of privatization of the economy. By the late 1990s exports began to expand. "In the last 14 years there has been an 8 times increase, quite an impressive increase, in the trade figures," Kiraly said.

What is the composition of the trade? "In imports there is transport equipment, such as Boeing aircraft, electronic items, vehicles, vehicle parts, aircraft parts. Agriculture is not really important. In exports we are experiencing the effects of investment by the multinational companies, with large exports of electronics, computer parts, software, and related industries."

The United States, Hungary's third largest trade partner, "imports from Hungary a lot of electronic items, computers, subassemblies, computer parts, chemicals, raw materials for the chemical industry, vehicles, and vehicle parts. German cars in Los Angeles are made in Hungary; also buses, where Hungary makes the parts and the final assembly lines are in the United States."

These lists mark a big shift from the country's traditional exports. "Hungary was always famous for food and wine, but partly because of the distance and the strict rules of the FDA it is difficult to export these items. Processed food accounts for only 2-4% of Hungarian exports to U.S."

Odon Kiraly said that some 40 of the largest 50 multinational companies have investments in Hungary today. This foreign direct investment fuels further layers of the economy by the use of subcontractors. "The Hungarian government is supporting their activity and gives them grants and supports to keep them there in Hungary."

In contrast to the vigorous growth of industry, "agriculture is in a difficult position in Hungary because of the very strong competition from the agriculture-oriented EU members and because of subsidies. When we started the talks with the European Union we believed that the high quality agriculture products would find a market, but this proved to be only partially true. The subsidies we are able to give are far lower than the subsidies in the Western European states."

On the impacts of the accession, Kiraly noted that by joining the EU Hungary achieved most-favored-nation status, which dropped its U.S. tariff rate from 8.9% to 6.5%, and that it is now easier for American companies to become part of projects in Hungary that are financed by the European Union. Further, goods produced in Hungary, where the average cost of skilled labor is about US$700 a month, now have automatic tariff-free access to the entire EU market of 470 million people. "Hungary is also a bridgehead to the Ukrainian and Russian markets where it is more risky to start a business directly," Kiraly said.

Russia's Oil Expansionism

Preston Keat: Russia's Drang Nach Westen

The next speaker was Preston Keat, research director of the Eurasia Group, a research and consulting firm that focuses on political-risk analysis for global markets, specializing in Russia and Central Europe. His focus was Russia's emergent oil empire. As its military and political power has waned, Russia has moved to consolidate government control over the country's massive oil reserves and use these to leverage ever widening efforts to dominate the oil business of nearby states. First it captured the oil industry in the Baltic states and is now seeking to expand its influence in Central Europe.

Unlike the Central European and Baltic states that have joined the European Union, Russia has largely failed to attract foreign investment. Keat presented figures showing that Hungary has been receiving annual per capita foreign direct investment of $299, Poland $152, while Russia has been attracting only $17 per person. "There is virtually no foreign investment in Russia," Keat said. "This is driven by the investment climate, insecurity about politics, and corruption."

What Russia has to fall back on is "the greatest output of oil per day in the world, greater than Saudi Arabia, though not the level of exports." Russia's average daily output in 2002 was 9.21 million barrels per day. The Putin government's strategy, Keat said, has been to recapture control of this valuable resource from privately owned Russian companies.

"In the past 18 months Yucos, the second largest privately owned Russian oil company, was broken up and is now government owned. Its head, Mikhail Khodorkovsky, was jailed. The government now controls 35% of the oil assets. The Putin government in a bold and ruthless manner has inserted itself into the economy and nationalized a large proportion of the oil assets."

This recentralization is being justified by Russian politicians, Keats said, by pointing to state control in Saudi Arabia and Mexico, "but the Russian state is controlled by a small group of ex-KGB officials around Putin and this raises particular fears."

The Kremlin has moved to use its own holdings and those of privately held Russian oil companies to extend its influence in the industry westward and southward into neighboring countries. "With its state-held assets but also with companies like Lukoil which has good relations with the Kremlin the Russian government has essentially taken over the oil industry in the Baltic states."

What Russia has done in the Baltics "has raised alarm bells for downstream producers in Western can Central Europe" He said a group of Central European oil refining companies have been particularly concerned, made up of OMV (Austria), Orlen (Poland), Unipetrol (Czech Republic), and MOL (Hungary).

"These four companies are negotiating to create an integrated Central European downstream energy company as a strategy to keep the Russians out by forming a group big enough to stand on its own. The Hungarian MOL Oil and Gas Company was already 10% owned by Russians through a shadow company in Budapest, which came as a surprise to the directors. At the operational level the management of these firms are very averse to Russian control of the oil industry. Even if the Russians have the right to buy their company through open shares on the market, they don't want the Russians to take over their companies."

There is also a brewing clash between Russia and Ukraine over the Odessa-Brody pipeline. This major oil pipeline has been used to pump Russian crude across Ukraine to the Black Sea port of Odessa. "After the Orange revolution in Ukraine the Ukraine government wants control of the gas trunk pipeline," Preston Keat said. "Much of Ukraine income comes from fees for gas transit on oil and gas from east and west Siberia and the Caspian. Ukraine is a key player. Its distribution assets were effectively controlled by Russia until literally about two weeks ago."

The new president and prime minister of Ukraine have stated that their intention is to change their relations with Russia. "The new government of Ukraine has suggested that they want to reverse the flow of this pipeline. Instead of Russian gas and oil flowing south to Odessa, they want Caspian gas and oil from Kazakhstan and Azerbaijan to flow north through Ukraine into Western Europe. How the Kremlin will react is interesting to put it mildly."

Russian-U.S. relations have worsened since the Iraq war and the Ukraine revolution, Keat said. "They disagree on many things and state them publicly, including Iran and its nuclear program. The recent insertion of democracy and democratic values into U.S. presentations marks a deterioration of relations with Russia." He added that it is interesting that the Russian company Lukoil now owns the former Getty service stations in United States.

After Putin: The next leader of Russia, Keat observed, "will come in with much more power than Putin did. Many financial analysts feel that a somewhat authoritarian government will be adequately stable, but we think the Russian developments are a major step backward for integration with Western Europe. This is not to say that Russia will ever join the EU, but it is an obvious partner to the EU."

Three Reports on the European Film Industry

Marina Goldovskaya: Don't Make Films that Present Only Russia's Dark Side

Marina Goldovskaya is a professor at the UCLA Film School, but she is also one of Russia's best-known documentary filmmakers. She has made 28 documentary films. "After perestroika started," she said, "and it was possible to talk about the evils of the communist regime and about the evils before that of the hundreds of years of tsarism, you could speak about anything. It was very dramatic and filmmakers liked it."

It is essential for filmmakers to have a dramatic story, but in her opinion the current Russian film industry has become steeped in negativity. "They have made an image of the country that is unpresentable. There are corrupt people, prostitutes, but in actuality there are also scientists, good people, teachers, there is life there. I don't think it is right to show things there only in dark colors. This kind of film became THE film. I went to a couple of Russian film festivals and I found it impossible. Life is not as bad as those films. I stopped going to them."

Professor Goldovskaya gave as an example the film "Children of Leningradsky." "That is Leningrad station, these are homeless children. They are breathing glue in order to get high. There were lots of staged faked sequences. I am a documentary filmmaker and I know. They staged fights, they staged the kids smoking these terrible drugs, breathing in a plastic bag. I could not get over the cynicism of the people making these films."

She said that her goal as a Russian filmmaker "was always to show Russian people with their problems, their mentality, to explain to foreigners the strangeness of Russian mentality, to explain where it all comes from."

After a long period when few films were made in Russia, Goldovskaya said that there is an upturn in the industry for narrative films. "Russia is now a very attractive market. After years of no films, of complete deterioration of the industry, Russia produces many films. Not as good as they were in the sixties and seventies, oddly, in the years of the totalitarian regime, but again it is one of the peculiarities of my country."

There are opportunities for foreigners for filming in Russia. "Very beautiful types can be used as nonprofessional actors. Then there is the labor. In Hungary it is 700 dollars, in Russia it is 200 to 300 dollars. Russians are still very well educated."

She recommended joint productions as the most fruitful. "They have to have a very strong Russian partner. They need a Russian partner because they do not know the realities. There is corruption. And Russians do not know how to do business. They don't have the habit of emails. You can send one email after another and they don't respond. You have to talk to them on the phone. Even better is to go there from time to time and make the decisions on the spot."

Peter Belsito: The German Film Market

Peter Belsito, executive vice president of Filmfinders, an international film marketing and rights clearing organization, took up some of the considerations in marketing films in an international arena. He said that there are about 60 distinct film markets in the world, defined by physical territory and language. "Some are multiple country: Germany, Austria, and German-speaking Switzerland; then there is the Middle East with 25 countries."

The top ten to fifteen markets account for about 85% to 95% of the gross. "That doesn't mean a producer will discard a $10,000 territory like Turkey, but North America is number 1, Germany is number 2, Japan number 3. China and Russia are very small. There is a lot of piracy in China."

With the evolution of home viewing technologies the income from movie theaters has become a fairly small part of a film's gross, Belsito said, "but extremely influential in terms of later sales. You get your reviews from the theatrical distribution."

The U.S. market "influences the entire world market in a very preponderant way. I have clients in Germany who will not buy a film that goes straight to video without a U.S. theatrical release. A film's inherent value internationally is less if it doesn't have a U.S. theatrical release, and the international release may account for 50% of the gross or more. Some films have only a one-week theatrical release, just to get some reviews that can be put on the video box."

Box office gross in movie theaters in 2004 was $9.4 billion in the United States and $1.2 billion in Germany, the second largest market. Among the current top six films showing in German theaters, Belsito said, 3 are American, 2 German, and one is Japanese. "German films accounted for 24% of that nation's box office in 2004, the highest for any year since receipts were first recorded." There is a new rise of German high quality films, like "Goodbye, Lenin," a comedy about son who tries to keep his mother, a devout communist who has just awakened from many years in a coma, from discovering that communism has collapsed.

Peter Belsito discounted the problem of U.S. film shoots moving to other countries. "Runaway production is a bogus issue," he declared. It happens because "the United States supports production the least. Production goes to Canada because it is heavily subsidized there."

Robert Cain: Central Europe Has Some Great Locations for Making Films

Robert Cain is president of Venture Spark LLC, a venture consulting firm dedicated to helping new and existing entertainment ventures with their strategy and business plans. From the perspective of a Hollywood producer, he said, "Central Europe and the former Soviet Union are becoming important as production locations for films and are also rapidly increasing in importance as a market." The Czech Republic, Romania, and Bulgaria are already important centers for various types of films.

"Costs are attractive, they have professional sound stages, equipment, fine cinematographers, and set designers," Robert Cain said. "Particularly the Czech Republic. Prague has invested a lot in infrastructure." Russia had a very strong tradition of filmmaking and cinema attendance until about 1990. "The average Russian went to the theater fifteen times a year. The collapse of the USSR ended that. Most of the theaters were changed into pharmacies and convenience stores. But that is changing. Kodak built a five-screen multiplex in Moscow in 1999, the first. That has sparked investment, new projectors, Dolby sound." Today there about 750 screens in Russia, although this is still only a fraction of the U.S., where there are "about 15 times as many screens per capita." Cain predicted there will be 3,000 screens in Russia by 2010. So far, "most of the box office has gone to Hollywood films. In another decade it may be one of the 6 or 7 largest markets in the world, coming from almost nothing a few years ago."

Europe's Trade with the United States

Isabelle Garzon: Despite Political Disagreements, EU Trade with the U.S. Remains Highly Stable

The keynote speaker at the luncheon that concluded the conference was Isabelle Garzon, former member of the cabinet of European Union Trade Commissioner Pascal Lamy. Ms. Garzon is currently a European Union Fellow at the University of California, Berkeley. "Despite a rapidly changing environment the European Union-U.S. trade relationship is remarkable stable," she said.

In an increasingly centralized Europe, Garzon said, "trade is one of the areas where Europe is the most integrated. It speaks not only with one voice but with one mouth. The countries have given up their powers in trade matters. We have one single trade representative, one single border, the same custom duties. This delegation of power to the federal level was also the beginning of the American union."

She suggested that unitary America is more internally divided today than multinational Europe. "Debates are more controversial in the U.S. Congress than in the European Parliament."

Because of the new high level of centralism in trade matters, Garzon said, "Europe is a reliable partner. When its representative speaks, he or she commits all the member countries. The EU does not change its position unpredictably. And with 450 or 470 million people, the European Union is the third most populous place in the world after China and India. It has 20% of world trade, equal to the U.S. share. It is also the largest investor in the world. Europe is a heavyweight in trade, as heavy as the United States to say the least."

While there is some level of rivalry between the U.S. and the EU, the various strong currents in world affairs have not disrupted trade relations between the two entities. "Globalization, economic slowdown, diplomatic tension have not affected the depth and breadth of EU-U.S. trade."

Daily transatlantic trade amounts to US$1 billion a day, Garzon said. Each side accounts for more than 20% of the trade each way, while U.S. trade with Japan amounts to 9% of U.S. imports and 7% of U.S. exports.

Garzon reminded the audience that beneath political discussions which are sometimes acrimonious there is a broad area of routine cooperation between the EU and the United States: "electric safety, agreements on pharmaceutical standards, regulatory cooperation, financial market regulation, certification of marine equipment, cosmetics, automobile sales." And the cross investment in stocks "is a thousand times greater than actual goods shipped."

Custom duties have been supplanted as a major issue between the two sides by issues such as regulatory cooperation and convergence of domestic corporations.

Still, there are differences of approach. Europe's view, she said, is that "being two elephants does not give you the right to squeeze others out of the savanna. It implies responsibilities."

While there is agreement in supporting the World Trade Organization, "I want to be honest and agree that there are some spices that make the meal very hot." Each player "looks for new markets and new trade partners." The EU  has the largest number of free trade agreements, 21 at this time, with Mexico, all the Mediterranean countries. "The NAFTA agreement triggered a European reaction leading to the trade deal with Mexico. Countries are good at playing on the EU-U.S. competition to extract the most from both, but we should be wary of following the competition path., especially in exclusive trade agreements with other countries and regions. As a matter of principle, bilateral free trade agreements should be used only to supplement multilateral trade relations."

EU enlargement is positive for American trade, Isabelle Garzon said. "It provides an expanded business area for free. The new members took on the EU trade policy. That makes 10 fewer countries to negotiate with and reduces their tariffs. An American investor established in Hungary has the right to provide services to the whole EU 25."