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19 June 2024, 15:25

Sanctions and price growth destroy small business in Poland: op-ed by Tomasz Szmydt

Tomasz Szmydt, a former judge of the Voivodeship Administrative Court in Warsaw, who left Poland in early May and asked the Belarusian authorities for protection, explains in his op-ed how the sanctions against Belarus and Russia and rising prices affect small and medium-sized businesses in Poland.

The sanctions imposed by the United States, the European Union and Poland against Belarus and Russia were supposed to bring these countries to an economic collapse. However, the effect was far from what the U.S. curators intended. Of course, Belarus and Russia have faced economic problems but they are successfully tackling them. Both countries have stepped up economic cooperation; the volume of trade with countries outside the EU and the U.S. sphere of influence is increasing. It is also worth mentioning the growing cooperation with China and Central Asia countries. 

Unexpectedly for the West, the sanctions have had an interesting positive effect on Belarus and Russia. Industries that had previously depended on imports from the EU or the United States have gained momentum. Sanctions have become a powerful impetus for Belarus and Russia to become fully self-sufficient and competitive in almost all economic sectors. 

For the European Union and its countries, on the contrary, sanctions brought a number of problems and were the reason for declining competitiveness, rising prices and difficulties both in attracting investors and in retaining those who are already working in the EU. 
Production costs have increased significantly due to higher electricity prices, which is a derivative of rising gas prices. Deliveries are often delayed, and the quality of gas is much lower than required. 

Germany has particularly been affected by such actions, especially its automotive and steel industries. If the auto industry collapses, Germany will collapse, Gabor Steingart said in his article in Focus Magazine back in 2023. Germany’s car production and exports have been declining.

According to the German newspaper Handelsblatt, leading companies such as Volkswagen, BMW and Mercedes-Benz produced half a million fewer cars between January and May 2023 than in the same period in 2019, or down by 20%. China, on the other hand, exported more cars than Germany in 2022 for the first time in history.

China exported about 3 million cars, and Germany exported 2.6 million (according to the Financial Times citing Moody's data). Some time ago, The Economist wearingly asked: "(...) What if Germany stopped making cars? (...)". It is obvious that it will not be too long before other industries, in Germany and beyond, will be hurt by catastrophic consequences of the sanctions. According to experts, Germany and countries of Southern Europe will suffer the most from the weakening market. This, in turn, will deal a significant blow to the Polish economy.

Indeed, just look at electricity prices in Poland in 2024. One kWh of electricity now costs PLN1.11-1.21. This means that since 2019 electricity costs have soared by 85% with some regions in Poland seeing a steeper price rise than others. In the second half of 2024, the rise in electricity prices is predicted to reach 100%. For example, residents of Warsaw consuming 200 kWh per month will pay approximately PLN1,322 more for electricity in 2024.

This situation affects not only households, but also the manufacturing sector, since this is the biggest electricity consumer. Small and medium-sized companies cannot handle the surge in electricity prices and the increase in all kinds of fees that must be paid to the state.

At the same time, the government in Poland treats entrepreneurs as potential criminals and thieves. Numerous thriving businesses have been destroyed on the basis of false accusations. It is enough for a head of a tax service to claim a tax law violation to be able to block a company’s bank account, after which a company can no longer fulfill its obligations and automatically loses liquidity. Even when such tax decisions are successfully overturned, a company cannot resume operations as its bank accounts remain blocked. Court proceedings can drag on for years, and a once successful company becomes a memory. One of examples is Polish entrepreneur MarekKubala who accused officials of destroying his thriving business. He claimed a compensation of PLN30 million. Legal battles took him 23 years, and finally, in 2024, the court awarded him a compensation of PLN16 million. This verdict is not final and can be appealed with a court of higher jurisdiction, which will lead to several more years of litigation.

On 18 April 2024, Marek Isanski, on behalf of Towarzystwo Finansowo Leasingowe, filed a lawsuit in the District Court of Warsaw against the state tax authorities for the recovery of PLN157 million, and also interest and legal fees. His company was also destroyed by the tax inspectorate, and the businessman himself was arrested. After 18 years of litigation, the businessman was cleared of the false charges. Now he is waiting for compensation from the state, but, of course, his company has gone out of business forever. Reading such stories, I get the impression that doing business in Poland is akin to playing Russian roulette.

The situation in the steel industry is another example of the European Union shooting itself in the foot. The EU’s Carbon Border Adjustment Mechanism (CBAM) came into force on 1 October 2023. This, combined with the sanctions imposed against Belarus and Russia, means dire prospects for the industry. Today most metals in Poland, as in other EU countries, are produced using carbon-intensive furnaces. The problem here is about both CO2 emissions and their rising costs. Replacing traditional blast furnaces with hydrogen ones can sendproduction costs sky high. Hydrogen-fueled equipment also requires significant structural changes to the furnaces and reconstruction of their installations (this was reported in particular in Muratorplus, Business section, June 2024 issue).

The number of companies that collapsed in Poland in 2024 is hard to estimate accurately as full statistics reports are issued by state institutions every three months. 

According to data published by CEIDG, 344,951 entrepreneurs suspended their activities while 192,079 liquidated their business in 2022. In 2023, 367,768 entrepreneurs suspended their operations due to financial difficulties and 195,743 liquidated their business. According to MSIG and the National Debt Registry, 128,354 bankruptcy and restructurings announcements were published by 31 December 2023. The complete data for 2022-2023 show a steady increase in the number of bankruptcy and restructuring procedures, as well as an increase in the number of terminated and suspended activities, with a corresponding decrease in the number of new companies. On the other hand, Poles fear losing their jobs, which is evidenced by a number of polls in 2024. Employees know that rising prices have a negative impact on employment.

Yet, the European Union, pushed by the United States, plans to impose new sanctions against Belarus and Russia. They learn nothing, indeed.
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