Orban Comes Under Fire From German Investors Decrying Cronyism

(Bloomberg) -- German companies have long treated Hungary like their backyard. Carmakers Mercedes Benz AG and BMW AG and Volkswagen AG’s Audi continue to expand their footprint, driving the country’s exports, while weapons producer Rheinmetall AG is building a handful of new factories.

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Yet an increasing number of others are less enamored with Prime Minister Viktor Orban’s government. Companies in retail, financial services, the media industry, telecommunications, and an airport operator are finding themselves in the cross-hairs of his nationalist drive to put assets in Hungarian hands, particularly people close to his leadership, according to executives.

Punishing taxes, a rapidly changing legislative environment and regulatory pressure mixed with overt political campaigns are all part of the ways to push foreign investors out of areas of the economy, according to Philipp Haussmann, deputy chairman of the Berlin-based German Eastern Business Association, whose members include some of Eastern Europe’s biggest investors.

“The situation in Hungary is frightening,” said Haussmann who’s also the chief executive officer of Klett Group, a German educational company with business in Hungary. “There’s a pattern of intimidation against foreign investors.”

Orban’s government makes no secret of its drive to boost local ownership in the economy as part of its “Make Hungary Great Again” nationalist agenda, though rejects allegations that it’s treated investors poorly. Yet the criticism catches the European Union’s longest serving leader at a delicate moment.

The EU is withholding €20 billion of funds over rule of law and graft concerns, his governing party is losing support ahead of EU and local elections and a budget crunch is complicating an already faltering recovery from a recession.

Since returning to power in 2010, Orban tightened his grip over all facets of Hungary, from media to the courts, and blurred the line between politics and business. Orban’s childhood friend, a former gas-fitter, came from nowhere to become a billionaire and Hungary’s richest person after a deluge of state contracts. Orban’s son-in-law is now an owner of luxury hotels.

Hungary’s reputation among investors is “excellent,” the Economy Ministry said in a statement. It pointed to a report by the German-Hungarian Chamber of Industry and Commerce that said four out of five German businesses would choose Hungary again for their investments. “The Hungarian government strives for cooperation based on mutual respect and partnership,” the ministry said.

Executives at some foreign companies say the growing appetite for choice assets is pushing the government to label a larger swath of the economy as “strategic” to make way for locals.

Take Budapest Airport. It’s partly owned and operated by Germany-based AviAlliance GmbH, a company that’s being pushed to sell the hub for a second time after a government pressure campaign criticizing it for underinvestment, a claim the operator has denied. An earlier buyout attempt — coordinated by a frequent business partner of Orban’s son-in-law in 2021 — fell through because of a budget squeeze.

The CEO of the Austrian company that owns the Spar grocery chain in Hungary, Hans Reisch, last month accused authorities of using special taxes to force a transfer of its business to people close to the Orban administration. The government plans to take Spar to court for defamation, Cabinet Minister Gergely Gulyas told reporters on April 25.

Spar this year expects to pay €92 million ($98 million) after a special sales-based levy in Hungary was raised to 4.5% this year from 2.7% in 2021, pushing the company to a loss. The firm has since overhauled its corporate structure to protect its business while the Austrian government has asked the EU executive to intervene.

A law being drafted that would give the Competition Authority powers to break up some companies created further anxiety. The regulator has since urged a delay to the bill’s adoption.

“It’s hard to tell which firms are subject to the legislation, when and where the red line is for them,” said Zoltan Nagy, who was president of Hungary’s competition watchdog from 1998 to 2010. “It’s dangerous for investments because it’s unpredictable. How do you build a business strategy to deal with such risk?”

Hungary has traditionally burnished its image as a magnet for foreign investments — and German ones in particular — since the end of communism more than 30 years ago.

The value of German investments in Hungary amounted to roughly €22 billion ($23.5 billion) in 2019, more than quarter of the total foreign investment. But it’s dropped since Orban ramped up market interventions and saddled companies with extra levies, declining by a third in three years, according to central bank data to 2022.

German carmakers continue to be the backbone of the investments, spurred by lavish state subsidies and tax breaks under Orban. Most recently, BMW and Mercedes teamed up with Chinese battery makers to make Hungary a launchpad of their transition to the electronic-vehicle era.

But elsewhere it’s a very different picture. Critics allege that taxpayer money ultimately ends up enriching Orban’s closest political and business allies. In January 2023, state lenders extended more than $1 billion in loans to 4iG Nyrt., a local firm Orban is grooming to be a national telecommunications champion, to purchase a majority stake in Vodafone Plc’s Hungarian business.

Meanwhile, the government’s cash crunch increases its reliance on taxes targeting specific industries. One international company in the construction sector now pays 69% of its revenue as taxes, according to an executive who declined to be identified on concern the company might be exposed to further punitive measures.

For that industry, “the most important principle is that foreign companies and foreign construction material are persona non grata,” Construction Minister Janos Lazar told reporters in November. “They have no place in Hungary.”

Growing pressure has pushed other companies to partner with the government. Erste Group Bank AG, Eastern Europe’s largest lender, agreed to sell a 15% stake in its Hungarian unit to the state in 2015.

Ostensibly, it was part of an industry-wide deal to lower Hungary’s bank tax, the highest in the EU at the time. The broader aim, according to a person involved in the talks at the time, was to make the bank a partner rather than the target of the Orban administration.

Vienna Insurance Group AG, another Austrian firm, was forced to delay its acquisition of Aegon NV’s Hungarian units for more than a year due to regulatory hurdles. Those obstacles were removed once the Austrian insurer agreed to sell a minority stake in its Hungarian operations to a state holding company. Steps blocking the deal were later deemed illegal by the European Commission.

Hungary sold its stake in Erste and most of its holding in VIG back to the companies as the government seeks to purchase Budapest Airport, a deal that people familiar with the situation said is being finalized. The aborted takeover attempt three years ago reportedly valued the hub at more than €4 billion.

“It’s not just about nationalization, but about putting companies in the hands of politically well-connected people,” said Haussmann, who hosted Orban in Berlin for a meeting with business leaders two years ago. “It is not a German-Hungarian issue, but a European one.”

--With assistance from Marton Kasnyik and Jorge Valero.

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