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Central & Eastern Europe Investment: Serbia: Knocking on the EU’s door and attracting ex-EU investment

Serbia is close to opening discussions on EU accession, which has long been a target for the country after the traumatic Yugoslav wars of independence during the 1990s. Serbia’s co-operation with the Hague-based International Tribunal for the Former Yugoslava and normalisation of relations with Kosovo in April 2013 finally laid the ground for accession negotiations. Membership, based on Croatia’s experience, could take place by 2020.

Accession talks may take time to translate into higher inflows of foreign investment and financing, but the process is crucial, says Tim Umberger, senior adviser at East Capital. “In the global war for capital, every single country has to do everything it can to decrease institutional risk for foreign investors and facilitate investment,” he explains. “Pre-crisis, investors went for increased capacity or market share; now it’s about investing in efficiencies.”

After falling into recession in 2012, Serbia’s economy rebounded, with year-on-year growth averaging 2% in the first three quarters of 2013. The Serbian dinar has remained stable, helping to keep inflation down. However, the EU described Serbia’s economic recovery as “fragile”.

“Domestic demand has been very weak as a consequence of high unemployment and a low credit availability,” says Umberger. “We would like to see the government to continue with reforms and privatisations to attract more investments that would eventually lead to more sustainable GDP growth.”

Unemployment in a population of 7.2m stood at 24% in 2013, with worse to come in the short-term. In 2014, the government, under a World Bank restructuring programme, aims to privatise, or close down, 179 loss making state-owned enterprises, costing 60,000 jobs. However, Tim Ash, head of emerging markets strategy (ex Africa) at Standard Bank observes that, as many of these employees have not been paid for some time and each would receive €300 per year of service, the move could, paradoxically, boost private consumption.

Exports have been the main economic driver, along with strong agricultural performance, but job creation is coming from large capital and infrastructure investments and government subsidies for job creation. This was the case with Fiat which, in 2008, took majority control of car manufacturer Zastava, best known for the Yugo, which has been assembling Italian models since the 1950s. Capitalising on significantly lower wages than at the company’s Polish operations, Fiat Automobili Srbija rebuilt a plant at Kragujevac and is now Serbia’s single biggest exporter.

EU membership notwithstanding, Serbia has maintained close investment ties with its long-standing ally Russia, including ruling out NATO membership.

In January 2014, Russia launched the Serbian construction of the South Stream gas pipeline from Russia via the Black Sea, Bulgaria, Serbia, Hungary and Slovenia to Italy, with spurs to Bosnia Herzegovina, and Croatia. South Stream Serbia is 51% owned by Gazprom, which is financing the Serbian portion in return for transit fees, and 49% by state-owned gas company Srbijagas.

“This is a strategically important project that puts Serbia on the European energy map,” stresses Umberger. The financial benefits include €2bn of construction work that would involve many local companies, as well as $200m (€147m) in annual transit fees.

China has also established a significant presence. As its first bridge project in Europe, China Road and Bridge Corporation (CRBC) is constructing Belgrade’s second bridge over the Danube, along with other infrastructure.

China’s latest investment, to be signed in January 2014, involves building a new coal-fired thermal unit at Kostolac, Serbia’s biggest power plant, alongside investing in a nearby lignite mine. It will rank as Serbia’s biggest capital energy investment project, and when completed would enable the country once again to export electricity. The bulk of funding for both the bridge and power projects is coming from Export-Import Bank of China.

The most unusual investment prospects are coming from Abu Dhabi, most likely rooted, as Tim Ash notes, in personal ties between Aleksandar Vučić, first deputy prime minister, and Crown Prince Mohammed bin Zayed bin Sultan Al Nahyan. In August 2013, Etihad Airways, the UAE’s flag carrier, took a 49% stake in Serbia’s loss-making JAT Airways, since renamed Air Serbia.

In 2013, Serbia received significant investments into its agricultural sector, and more controversially signed weapons export and development deals, while the Abu Dhabi investment company Mubadala has signed a memoranda of understanding with Serbia on semiconductor, renewable energy, telecommunications and areospace manufacturing projects. These investments indicate the attractiveness of Serbia’s skills, its IT and agricultural base, and its access to European airline routes.

 

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