Winners and losers
The break-up of the former Yugoslavia left a number of successor states that have small economies but huge economic potential.
However, this potential has not been realised because of the impact of the Balkan conflicts in the 1990s that accompanied the break-up and that not only halted development but set it back some years.
So while Yugoslavia's economy before the break-up was much stronger and more developed than those of Bulgaria and Romania, they are now in a much more favourable economic situation than the post-Yugoslav republics.
Political stability remains the primary concern of any investor, particularly in the areas that have long been characterised by conflicts. The fact that the Balkans is Europe's most ethnically diverse region has been a decisive factor in the economic and political situation of the past and will continue to be into the future.
And lately, the news coming from the region has been mixed.
But the rest of the region has not been so fortunate. In Serbia, a general election in January saw the Radicals, led by Hague Tribunal defendant Vojislav Seselj, emerge as the largest party. It took until May for more moderate and reformist groupings to cobble together a fragile coalition. That now faces key challenges, notably its willingness to co-operate with the Hague Tribunal and the Kosovo issue, which will test its own cohesion and determine the country's relations with the EU.
Montenegro's secession from Serbia last year had little effect on the Serbian economy because the Montenegrin economy is so small. Nevertheless, the separation cost Serbia its access to the Adriatic, although business links were not severed.
But Romania has also experienced political instability. A bitterly personal dispute between the leaders of the two main reformist parties, Prime Minister Calin Popescu Tariceanu and President Traian Basescu, saw the president's supporters leave the government and a parliamentary alliance between the prime minister's party and the former communist opposition suspend the president from his post. Basescu's restoration by an overwhelming popular vote in a May referendum only added to the volatility. The two main protagonists must now find a modus vivendi, a difficult task in a country of weak political institutions and strong political personalities.
The Bosnian economy has made significant progress since the 1995 Dayton Agreement. But although an overarching Bosnia and Herzegovina government is in place, there are clear political and economic differences between the Bosnian Serbs of the Republika Srpska on the one hand and the Muslim Bosniaks and Croats in the BIH Federation on the other, with the former having built economic links with the Eastern Orthodox world, including Serbia, Russia and the Ukraine and latter fostering links with Algeria, Libya and Turkey.
Macedonia has been more successful at managing its ethnic questions. The most economically underdeveloped republic of former Yugoslavia, with a population that includes a Slavic majority and a substantial Albanian minority, it agreed an EU-brokered power-sharing arrangement that forestalled a decent into conflict. At the end of 2005 the EU agreed to accept Macedonia as candidate for membership.
Slovenia stands out as a clear exception. Before the break-up it was regarded as the most developed part of Yugoslavia and it emerged from Yugoslavia with its economy intact. This relative economic development and its intimate knowledge of its former Yugoslav partners' environment, people, languages and habits have left it well positioned to establish capital connections in the region, and it is attempting to position itself as a link between the Balkans and the rest of the world.
However, given the size of the Balkan economies the region's capital markets are small. Traditionally small economies are made up of small enterprises, but they include a number of interesting listed companies. In addition, there is still great scope for privatisation. The vast majority of state-owned companies have been privatised, but the states have generally retained minority stakes in those sectors deemed strategically important, including energy, transport, mail services and infrastructure, and governments continue to act as price regulators.
Nevertheless, the opening of their markets and their integration with foreign partners suggests that their organic growth is potentially much higher than in the previously closed domestic economy.
The most rapidly growing sectors are the same throughout the region - energy, finance, construction, commerce and telecommunications. Many companies are hiding unexploited potential that, with the expansion of operations, are attaining levels of 20 years ago when they operated to meet the needs of non-market, centrally planned economies.
But only a handful of foreign portfolio investments are evident on the Balkan capital markets, and although each republic records positive inflows from abroad, this is mostly due to cross investing.
This is reflected in the experience of Slovenia and Croatia. Domestic companies in both countries are recording economic growth. There are increasing numbers of takeovers by western multinationals and portfolio investments from abroad. However, this has resulted in unfavourable indicators - the average P/E of both indices is around 25 - despite the organic growth of domestic companies.
Recent years have seen an accelerated development of the mutual fund industry, with Slovenian and Croatian registered mutual funds covering various regions and sectors around the world. But the Balkan region is the most popular with savers and
managers are placing a lot of assets in the region.
Because of their geographical position and their knowledge of local conditions, Slovenian and Croatian capital is being invested in Bosnia and Herzegovina, Serbia, Macedonia and Montenegro.
Slovenian and Croatian open- and closed-ended funds contributed around €500m to the markets of the former Yugoslavia last year. This may not sound much, but it caused a real shock on such shallow markets. Indices on an annual level grew by two-to-three times.
Other countries are still getting used to mutual funds. Legislation in Serbia foresees the use of mutual funds from this year and the same is expected in Bosnia-Herzegovina.
The Balkan story does not suit every investor. Investors in Balkan capital markets encounter relatively low liquidity. The average numbers of daily transactions in the individual markets total only a few million dollars. And the participation of foreign investors is also exceptionally low as a result of language barriers and low transparency of companies' operations - business accounts usually do not reflect the real situation within companies. But these countries are obliged to implement economic, legal, political and other reforms, changes that will have a positive impact on their development. The fact that the Balkan economies are growing faster than mature European economies is a logical consequence of their relatively cheaper resources and lower starting level.
For example, while unemployment, which in some Balkan countries exceeds 30% of the workforce, poses a major problem it also implies an abundant and cheap labour force. And there are surpluses of other resources, including raw materials and energy. But capital, which is required to employ these resources, is also in short supply.
An added attraction for investors is that the relative lack of foreign players in their markets means that the Balkan indices are completely uncorrelated with global markets.
Branko Železnik (email@example.com) is fund manager for the Balkan region at Ljubljana-based MP Asset Management