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Ailing Austria

Alison Langley, Vienna
February 18, 2015

While the world waits to see whether the Ukraine ceasefire will hold, Austrian businesses look on with dismay at increasingly slim prospects that the economy will pick up this year, writes Alison Langley from Vienna.

Image: picture-alliance/dpa/H. Neubauer

After years of enjoying fat profits with Austria's central and eastern European neighbors, business leaders fear that Russia's war with Ukraine could ruin Austria's prosperity. Sanctions, a weakened ruble and low oil prices are all combining to cripple demand.

Austrians are becoming reluctant Europeans, impatient with geo-politics that hinder their nation's growth. They are sitting at the edge of their seat, hoping that the latest ceasefire in Ukraine will hold and that business can get back to usual.

"Everything that happens in central and eastern Europe directly affects Austria much more than, say, Portugal," Stefan Bruckbauer, an analyst for Bank Austria, told DW. Some 70 percent of Austrian exports go to central and eastern Europe.

Austria's central bank estimates GDP will grow by only 0.4 percent in 2014. Unemployment, although low by EU standards, is at its highest peak in 30 years.

Increased sanctions, like the ones announced Monday by the EU, lead many Austrian leaders to fear there is worse to come. The business community in Austria, which once fully supported sanctions, now speaks openly about the negative effect on companies' net earnings.

"We don't believe economic sanctions will lead to the political solution we are all aiming for," Walter Koren, director of the Austrian Foreign Trade Organization, told DW. Koren points to a study released this week by the Austrian Institute for Economic Research (WIFO) that in a prolonged, intensified trade war, Austria could lose up to 45,000 jobs and 2.9 billion euros.

Koren said only through strong diplomatic efforts - and not economic or military - can the situation in Ukraine be resolved.

Bad for business

two men signing document
Austria can't afford to lose out on business dealsImage: Reuters

While the US encourages stronger sanctions and possibly supplying arms to Ukraine should the Minsk II ceasefire fail, Bruckbauer says Europeans, who have closer economic and territorial ties to the region, have a different view. "Europe should find its own position and not follow the US," he said, echoing comments made by Austria's Chancellor Werner Faymann.

"I can't approve of the euphoria of many in the EU over the success of sanctions against Russia. I see absolutely no cause for celebration. I don't know why we should be pleased if the Russian economy collapses," Faymann told the newspaper Oesterreich last December. "We'd be sawing off the branch we're sitting on if we erected a new wall to Russia's economy."

This isn't because the former Soviet might plays a big role in Austrian manufacturing - direct exports to Russia account for only about 0.8 percent of the Austrian economy. Instead, it's because Austria's main trading partners think they do.

Industrial goods drive Austria's economy. Companies from Germany, Slovakia and the Czech Republic purchase Austrian machinery and parts. So when these manufacturers believe demand for their goods will be low, they are slow to order the machines and parts.

Sentiment and sanctions

"Sanctions themselves don't play a big role" on the Austrian economy, Bruckbauer said. "Sentiment hurts much more."

And it's not just sentiment. Austrian business leaders also worry - a lot as it turns out - about the prospect of a trade war.

Shortly after the EU announced a new raft of sanctions against Russians, the foreign ministry in Moscow said it would respond "adequately." What that means at the moment is unclear, but Bruckbauer said a trade war "would definitely be negative for the Austrian economy."

Mostly, energy security looms as a potential risk for Austria. Currently the Alpine country says it has nearly a years' supply of energy. Should Russia cut off oil and gas, the Austrian economy would suffer greatly - not just in manufacturing, but also in other sectors. In addition to manufacturing, retail, too, feels the blow. The number of Russian tourists fell 4.3 percent last year, and that is hurting sales.

Staying away

luxury shop Copyright: Alison Langley
Bad for businessImage: DW/A. Langley

While the after-work crowd struggles to pace their walking amidst the hordes of weekend tourists just arriving in Vienna - overall, overnight stays are up 2 percent in Austria - all is quiet on the secluded Golden Quarter pedestrian zone, a u-shaped shopping experience brought to the uber-rich by brands like Prada, Brioni and Church's.

Wealthy Russian investors spurred the development of the gilded shopping area, which opened last spring to cater to a once swelling number of Russian and Chinese visitors visiting the Austrian capital. The Chinese are still coming, but these days, Russians aren't - or can't - travel to Vienna like they once could, hurt by the weakened currency or by sanctions. One store assistant manager said his luxury store saw 7 percent fewer Russian clients year on year.

"Volume is down year-on-year by 10 percent," said this assistant manager, who wished to remain anonymous.

As for the tourism and retail industries, sales along the Graben and Mariahilferstrasse, Vienna's main shopping drags, continue into February, well past the time when winter bargains normally are up for grabs.

New tourists on the block

But businesses along the Golden Quarter - which, as a rule, do not have sales - remain confident for this year. Though Russian tourists may be fewer, many of their Russian customers have residences in Vienna and have protected their wealth against a falling ruble.

At one menswear store, where sweaters start at 800 euros, a salesman said, "Our customers have the money; they know our brand; they will continue to come."

luxury shop Copyright: Alison Langley
That fur coat will have to wait until next yearImage: DW/A. Langley

At a bespoke shoe store, where a clerk whiled away a quiet afternoon polishing the handcrafted ware, the branch manager said his store has seen fewer Russians, but far more Chinese and local Austrian clients.

All the managers polled along the Golden Quarter said that while Russian tourists may be staying away for now, the luxury shops are watching a new group which might be spurred on by a strong currency to visit Vienna - the Swiss.

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