Poland: Still a good bet

As Poland looks forward to parliamentary elections this fall, and marks a year of Russia’s full-fledged invasion of neighboring Ukraine, the time is ripe to examine the prospects for U.S. investors and importers/exporters seeking to find their place in the Polish economy.

Looking back over the past year, three facts of fundamental importance for people doing business with Poland have become clear:

• NATO is real
• The EU means business
• Poland is still a land of opportunity?

Contrary to fears in February and March last year, Russia’s brutal invasion of Ukraine has actually confirmed Western security guarantees for Poland – in fact, it has strengthened the country’s role in the alliance. Also, during the past year, the EU has slowly but steadily tightened its requirements for Poland to respect the commitments to rule of law that it made back in 2004, when its citizens voted overwhelmingly to join the bloc. And finally, the fallout from the pandemic and the new geopolitical landscape created by the war in Ukraine have created fresh opportunities for those seeking to do business in the EU’s sixth-largest economy. They can sleep soundly, because:

NATO is real

In early March 2022, an American entrepreneur in Warsaw might be overheard complaining about how she had spent years building a business in Poland, and now it was all for naught because nobody would want to invest in a country that looked like it was next on Vladimir Putin’s hit list.

What a difference a year makes. Today NATO’s commitment to Polish security is stronger than ever, and this is a key reason why Poland is still a fantastic investment destination.

Poland now plays host to 12,000 service members from other NATO member countries, including 11,000 from the U.S. Some of them are operating state-of-the art weapons systems such as F-22 Raptors and Abrams tanks. There are also 600 British soldiers, including Challenger tank crews, and 300 Germans manning Patriot antiaircraft missile batteries. Last year the U.S. Army established a permanent headquarters for its V Corps in Poznań, the easternmost Army base in Europe. While previous deployments were largely thought of as a “tripwire” – on the theory that if Russia invaded, inevitable casualties among Western soldiers meant the allies would have to commit more resources – the U.S. and others are now basing serious forces in Poland.

That same entrepreneur might now be heard saying: I’m no longer worried about security, because if there’s a strike on Poland, it’s all over anyway – if Warsaw isn’t safe, nowhere is safe.

And Poland isn’t just relying on its allies for protection; the government has announced ambitious plans to double military spending to 4% of GDP, twice the minimum commitment required by NATO, this year, and to expand the military to 300,000 people (in a nation of 38 million). The country is buying more than $15 billion of armaments from the U.S., including F-35 fighters, Abrams tanks and Patriot missile systems. Poland is also setting up a defense procurement relationship with South Korea, buying tanks and fighter planes and developing a Polish chassis for a Korean artillery system.

The relationship between Poland and the U.S. has also been strengthened on the political level, with two visits by President Joe Biden in the last 12 months. Cooperation is intensifying in other areas, such as energy, with shipments of U.S. LNG to Poland’s Baltic Sea import terminal and plans to develop nuclear power using American technology.

Despite these generally positive developments, there have been occasional missteps in political relations with allies as the government strikes a nationalistic pose for the benefit of its electoral base. For example, when Germany first offered to send the Patriot systems, there was a confused official response, with ruling party leader Jaros?aw Kaczyński (whose only official title is Member of Parliament) rejecting the plan, in line with his party’s anti-German rhetoric, and President Andrzej Duda welcoming it. More recently, after a U.S.-owned television station in Poland aired a documentary critical of Pope John Paul II, the government summoned the U.S. ambassador to express its displeasure. But while we can expect more of such incidents from time to time, there is no reason to believe these self-inflicted wounds will seriously impact relations with Washington, Berlin or other allies.

Poland’s people have won enormous goodwill among their fellow Europeans for their incredible outpouring of popular support for refugees from Ukraine. Still, while the government has largely supported grassroots efforts, including by providing assistance for people who host refugees, it has been unable to parlay this positive sentiment into financial support from the European Union, or greater political power in the EU. Part of this is because in 2015, when other European countries were facing a refugee crisis, Poland – under both the previous and the current ruling party – refused to accept a single migrant. But it is also because after eight years of sustained hostility from the Polish government, Brussels has finally had enough. With a new, harder line that began in earnest in the middle of last year, it is now clear that:

The EU means business:

When the current ruling party took power in 2015, it immediately set about restructuring the judicial system, saying changes were needed to improve the courts’ functioning and to get rid of ineffective judges, many of whom served the previous totalitarian regime. The European Union has been critical of many of the changes, saying that they mask an attempt to gain greater political control over the judiciary and undermine the rule of law that is at the core of the EU’s common value set. To be fair, challenges to the rule of law have accompanied the rise of populism around the globe –in the U.S. of course, but also in Brazil and most recently Israel. Still, any foreigner doing business in Poland must keep in mind that a politicized judiciary will inevitably lead to politicized decisions that could favor national over international interests.

Since 2015, the government has continued to make changes to the judicial system, and the EU has continued to take various steps to thwart those changes. There has been much back and forth, exchanges have been heated and divisive, and progress on either side of the arguments remains unclear. Particularly to non-EU investors and business partners, the situation has been very confusing, to say the least. There is little to objectively indicate that the functioning of the judiciary has improved (there is actually some evidence to the contrary) and the EU’s internal governance procedures have to date largely proven ineffective in changing the policies, behavior and persistence of the Polish government. Money has a way of changing things, however, and that may soon happen with this standoff. Last year Brussels said it wouldn’t disburse €36 billion of Covid recovery funds (as well as money from other very significant funding categories) until Poland achieved certain milestones, including undoing some of the changes to the judicial system. And the EU is sticking to its guns: it is now threatening to withhold the €75 billion in assistance already scheduled for disbursement over 2021-2027. Those funds are equivalent to about 2% of Polish GDP each year in that period – in addition to the multiplier effects of the infrastructure investments they pay for.

After much domestic horse-trading, early this year Poland passed a law that will likely be acceptable to the EU. Remarkably, that legislation has been delayed because it needs the blessing of a judicial tribunal that has been unable to determine whether it is properly constituted – yet another black mark against the Polish judiciary. The government would certainly be helped if Brussels began payouts in time to boost the economy ahead of the parliamentary elections due by November 5, but that is an increasingly dim prospect.

At this point, it might be reasonable to ask how anyone could encourage investing in or trading with a country like this. A fair question, to be sure. And the answer is that people have always done business in Poland despite the court system, not because of it. The World Bank's Doing Business survey bears this out. Before the ranking was discontinued in 2021, Poland came in 51st for protecting minority investors, and 55th for enforcing contracts – behind countries such as Uzbekistan, Bhutan and Cabo Verde, none of which immediately springs to mind as an FDI powerhouse. And yet despite those ratings, only Germany attracted more FDI last year than Poland among EU members.

A reasonable base case scenario is that the government will eventually address the most aggressive of its changes to the judiciary to the satisfaction of the EU – or it will be voted out and a new government will do so. The overwhelming majority of Poles continue to support EU membership – more than 80% in recent polling – and it is difficult to imagine that they will allow that status to be lost.

In addition to the EU’s role in protecting the rule of law, foreign investors in Poland, including those from the U.S., still enjoy the protection of more than 60 bilateral investment-protection treaties. American investors in particular can take comfort from the State Department’s robust response to the Polish government’s repeated attempts to make Warner Bros. Discovery sell its stake in leading private broadcaster TVN. And sophisticated business players will always favor private arbitrations in their contractual arrangements. Taken all together, this leads us to conclude that:

Poland is still a land of opportunity

The fall of communism in 1989 was followed by a steep recession and hyperinflation. In 1992 the economy began growing – and it didn’t stop for three decades. Even during and after the 2008 global financial crisis, Polish GDP kept on rising. In 2020, the Covid-19 pandemic finally ended this remarkable run, causing a contraction by 2% (compared with 6% for the EU as a whole). However, the economy came roaring back, growing by 6.8% the next year and 4.9% in 2022. Following Brexit, the economy is now the sixth largest in the EU.

And Poland has solid foundations for further growth. It boasts a population of 38 million, the fifth largest in the European Union, meaning both a sizable domestic market and a steady supply of labor. The education system is robust, particularly in STEM, and is drawing increasing interest from students around the world, including South Asia. Labor costs remain relatively low, and labor productivity grew by an average of 3.4% each year from 1999 to 2022.

Over the past two decades the EU has invested more than $150 billion in the country’s transportation and other infrastructure, including €86 billion from 2014 to 2020 alone. In addition to the domestic benefits, better road and rail connections have transformed Poland’s ability to trade with its neighbors, most notably Germany, the world’s fourth-largest economy. Polish companies are key suppliers to German manufacturers, including carmakers.

That means Poland is well positioned to benefit from the global trend of reshoring, as companies reconsider their supply chains in response to Covid. Perhaps even more intriguing are the prospects for “friendshoring,” where geopolitical alliances are taken into consideration in manufacturers’ location decisions. And here strong U.S. ties will work in Poland’s favor.

Poland’s commitment to invest in its armed forces, as well as its allies building up their presence on its territory, presents opportunities for companies in the defense sector, as well as related technologies and construction services.

In addition to the unspeakable human tragedy of the war in Ukraine, the material losses are in the hundreds of billions and growing. Donors are already planning the reconstruction effort, and due both to its geographical location and its strong support for its neighbor, much of this aid will flow through Poland and will benefit Polish companies.

Finally, after decades of dragging its feet to appease the powerful domestic coal lobby, Poland is now committed to the green transition, providing opportunities for suppliers of renewable energy technologies. To be sure, the funding dispute with the EU is holding up financial assistance for development in this area, as well as other infrastructure projects. Still, projects in previous years provide a solid domestic foundation for further growth.

Poland has already attracted some $200 billion of foreign direct investment since 1989, and the flow isn’t stopping; flagship projects last year included a €1 billion Mercedes electric vehicle factory, and a €300 million facility from Daikin that will make heat pumps for residential buildings.

Another attractive element is Poland’s very competitive system of financial incentives for foreign direct investment, including tax relief, special economic zones and financial support for R&D and job creation. The Polish Investment and Trade Agency (PAIH) has several offices in the U.S., aggressively courts inbound investment and is a good place to start when making investment decisions. In general, U.S. investors should also expect to be impressed with the professionalism of their business and governmental contacts in Poland. Legal, accounting and other services are on par with those found in the U.S.

Beyond just the exciting market possibilities, as noted in Erin Meyer’s seminal “The Culture Map” and other cross-cultural studies, Polish business and communication habits are much closer to the ways of Americans than in almost any other region, and even closer in some cases than traditional markets such as France, Italy and Spain. That means less time and effort is required dealing with cultural differences, leaving more bandwidth for just getting business done.

Conclusion

Poland isn’t free from problems, of course, and the elections this fall bear watching, with polling still uncertain at this point. The unlikely worst-case scenario is an alliance of the current ruling party with a small far-right group. As in other places that have seen a rise in nationalism, including the U.S., there have also been disturbing anti-Semitic and anti-LGBT incidents in Poland. But developments since 2015, and particularly in the past year, give a reasonable basis for the conviction that the EU is an effective guardian of the rights and freedoms of both individual citizens and of businesses.

While Russia’s invasion of Ukraine initially highlighted Poland’s weaknesses, one year later the response from Poland, its Western allies and most of all the Ukrainians themselves have in fact shown up the weakness of Russia and the continuing attractiveness of investment in this exceptional part of the world.

NATO is real and the EU means business. And those two facts, combined with the remarkable resources of this country and its people, mean that Poland is still, perhaps more than ever, a land of opportunity.

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About the authors:

A native Californian, Nathaniel Espino has been based in Warsaw since 1995, with stints in Vienna, Kyiv and Beijing. He spent 12 years as a financial journalist with Bloomberg and Reuters; reported from Euromaidan during Ukraine’s 2014 Revolution of Dignity; and is a founding partner of the Warsaw-based PR agency Aldgate Strategy Group.

Ron Given has experienced 40+ years in the practice of law, first with the international law firm Mayer Brown, then as the General Counsel of a listed, global insurance group, followed by more than a decade of living in, practicing and successfully managing and growing law offices in Zagreb, Prague, Kyiv and Warsaw, as well as throughout Central Europe, for Vienna-based Wolf Theiss and Deloitte Legal. From Chicago, Ron currently focuses on coaching law firms and lawyers in the Americas and Europe and is a Board member of ITCC.