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The CEE Winter Shutdown

The CEE Winter Shutdown

Issue 9.12
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With numerous reports of energy-related business shutdowns, we reached out to local experts across CEE to understand what different markets have been dealing with, in terms of work and production stoppages, and look into the broader impact.

The energy crisis in 2022 took its toll on energy-intensive companies and deeply affected many other businesses. The major factor behind it, according to Penteris Senior Partner Andrzej Tokaj, is “the high price of commodities – reflected in rising food and energy prices, leading to the increased operating costs of companies.”

“Simply put, the Russian invasion of Ukraine means that the Slovak economy is exposed to potential serious gas supply disruptions, as approximately 85% of its natural gas is imported from Russia,” Havel & Partners Partner Ondrej Majer says, with ACI Partners Managing Partner Igor Odobescu adding that  energy-related shocks in Moldova have resulted in a sharp rise in natural gas prices: “the average price paid by consumers, not including power plants, has increased sixfold in one year.”

Consequently, the markets in different countries are coping with the increased energy prices and potential scarcity of resources in different ways. Some markets have already seen temporary or indefinite shutdowns being announced. 

Energy-Intensive Industrial Production Grinds to a Halt

In Poland, “the industries that consume the most energy in their operations have been hit the hardest,” Tokaj notes, adding that those energy-intensive sectors “include the paper industry, fertilizers and the nitrogen compounds industry, and those producing cast iron and iron alloys.” According to Tokaj, “to date, the most high-profile production stoppage on the market has been at the chemical giant Grupa Azoty, which, in August, decided to suspend or reduce production at some of its plants due to the high gas prices.”  He explains that Grupa Azoty “is Poland’s largest chemical industrial company.” Until now, “the production of melamine, a chemical compound used in the adhesives, paints and varnishes, automotive, and textile industries, has not resumed,” he adds.

“In Moldova, building materials manufacturing is, so far, the industry most affected by the higher gas prices,” Odobescu reports. “At least two major players – the biggest brick and insulation materials manufacturer and the only significant porcelain tile producer – have announced production stoppages for an undetermined period.” According to Odobescu, “besides that, local authorities in the breakaway eastern region have reportedly limited the supply of gas and electricity to the only steel factory in Moldova, halting production.”

Majer highlights that, in Slovakia, the factories in the metallurgical, automotive, chemical, glass, and food industries are experiencing the most acute problems: “one of the major aluminum smelters […] discontinued its operation at the beginning of autumn. In the summer, a diversified Central European ferroalloy producer also had to discontinue its operations and dismissed approximately 150 employees. It is currently unclear when these companies will restart their operations.” According to Majer, both companies belong to the largest metallurgical players in Slovakia.

Kavcic Bracun & Partners Managing Partner Matej Kavcic highlights that Slovenia’s “metals industry, non-metallic mineral production, and paper production account for almost half of all the energy consumed in Slovenia, especially electricity,” with the “metals industry among the top manufacturing industries in terms of both turnover and exports.” Companies in the metals industry “have announced a reduction in production,” he reports, “with Slovenia’s biggest metals producer, the SIJ Group, announcing it will reduce production volumes by about one-third in September due to the extremely high energy prices and the uncertainty of customers accepting such price conditions.” According to him, “it is also expected that overall production will be about 40% lower in the fourth quarter of 2022” and, while those companies informed the public that there will be no redundancies for the time being, they “have introduced shorter working-hours and temporary paid layoffs.”

Serbia has also seen some shutdowns, Gecic Law Partner Ognjen Colic notes, highlighting that “the factory in Novi Sad, part of the American Lear Corporation, has suspended work due to the situation in Ukraine. According to a management letter to employees, there were problems with the supply of components for production and customer orders, which led to the production stoppage.” He says that “approximately 2,500 workers were employed by this factory, which ceased operation” and, “therefore, the impact is significant.”

According to Cobalt Partner Elo Tamm, in Estonia, the food production sector has been vocal that high energy prices are affecting its ability to continue production. Even worse, “permanent production stoppages and lay-offs have been announced in the furniture production and wood industry,” she notes.

Transport, Hospitality, Retail, and Small Businesses Under Pressure

In Croatia, Cipcic-Bragadin Mesic & Associates Partner Marina Mesic reports that “transport companies were most affected by the increase in fuel prices, where fuel prices directly affect the growth of input costs the most, since they make up 20 to 50% of their total variable costs.” 

And the crisis also seems to be impacting sectors that are traditionally not considered energy intensive. “Smaller businesses that may be affected by the increase in energy prices are those in the hotel, restaurant, arts, entertainment, recreation, and other services sectors, also hairdressers, and beauty salons, amongst others,” Tokaj notes, highlighting that these industries are struggling, as they “had already been affected by restrictions introduced in connection with the COVID-19 pandemic.” Kavcic agrees, saying that “the rising costs of energy are also affecting the Slovenian tourism and leisure industries that consume a lot of energy, like ski-resorts, spas, etc.”

According to KCG Partners Founding Partner Eszter Kamocsay-Berta, the most affected companies in Hungary include “shopping malls, restaurants, theaters, kindergartens, and spas, where large spaces need to be kept warm.” Many restaurants are likely to opt for a temporary winter shutdown, she says, “but, in reality, this can be a very dangerous move, as they are unlikely to be able to keep their workers or lure them back when they reopen. 20 to 25% of Hungarian hotels are planning temporary closures in the first half of 2023.” Kamocsay-Berta reports that measures such as turning off “the evening outdoor lighting in restaurants before closing time” and “going digital, avoiding the energy costs of operating buildings,” are also frequently applied.

A Metered Government Response

The measures introduced by CEE governments range from price caps and subsidies to temporary export bans.  “Due to high energy prices and limited energy sources, the Polish government has introduced several regulations providing solutions for citizens, vulnerable parties, and energy companies so that, based on supplements and compensation, the final energy price is lower, known as the government energy shield,” Tokaj says. 

In Serbia and Hungary, price caps have been introduced on some basic foodstuffs. “Regulations that limit the prices of oil derivatives have also been adopted in Serbia, which, as a result of global market activity, last for a brief period and are subject to change,” Colic reports. “The government also set limits to the price of electricity for businesses, to run at EUR 95 per megawatt-hour from September 1 to December 31.” In addition to foodstuff price caps, Hungary’s government “has also imposed a 25% saving on gas consumption in state institutions and state-owned companies, except for hospitals and residential institutions,” Kamocsay-Berta notes.

Other than energy price caps, among the measures introduced in Croatia “are the reduction of the VAT rate on gas and some agricultural products, subsidies for the price of gas for households, changes in the system of benefits for the socially disadvantaged, one-time benefits for pensioners, and some others,” Mesic reports. 

And Tamm notes that, while Estonia’s government “has instituted regulated energy prices for residents and SMEs, there have been no significant measures to help industrial and other businesses cope with high energy prices.” 

Meanwhile, in Moldova, the state also provides compensation and subsidies to ease the burden on companies. “To prevent shutdowns caused by high energy prices, monetary payments to compensate for increased natural gas prices were approved in March 2022,” Odobescu notes. Similarly, Slovenia’s government “introduced three different types of aid available to beneficiaries, namely: basic economic aid, special economic aid, and aid for energy-intensive businesses,” Kavcic points out. And in Slovakia, Majer reports an act was adopted allowing companies to request “subsidies covering additional costs caused by increases of gas and electricity prices,” and, additionally, “a special aid scheme was designed for electricity-intensive companies, which are allowed to request compensations.” 

Majer and Odobescu both highlight that other special measures have been introduced to prevent potential shutdowns caused by energy scarcity. According to Odobescu, “natural gas reserves were created, for the first time ever, by the state-owned energy trader. The gas is stored in Ukrainian and Romanian gas storage facilities and is sufficient to cover more than one month of consumption during the winter.”

Finally, Colic points out that temporary export bans were also introduced in Serbia in 2022, with the government banning the export of certain goods, including “wood, gas, milk, oil, wheat, corn, and flour.” Odobescu adds that “as a response to the electricity deficit in Moldova, a temporary ban on crypto-mining activities was also ordered.” 

This article was originally published in Issue 9.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.