Russia

Russia’s share in the region’s foreign trade, investment, credit, and remittance flows has been on the decline for several years, falling from one of the region’s top economic partners at the beginning of the century to single digits today.[1] Although the Western Balkan countries have been relegated to a third-rate level on Moscow’s foreign policy list, the region has not become irrelevant for Russia.[2]

 

Russia remains among the key economic partners for Serbia and also focuses on developing closer ties with the Republika Srpska entity of Bosnia and Herzegovina (BiH). Its economic activities predominantly focus on the energy sector. Dependence on Russian oil and gas is the principal source of potential vulnerability for Serbia and Republika Srpska as well as Macedonia. Russia’s involvement is structurally very different in Montenegro where Russsia is the biggest direct investor.

 

Notwithstanding Russia’s relatively small economic presence in the region when compared to the EU involvement, Russia has been consistently perceived and portrayed as an important investor and economic partner throughout the region.

 

Bosnia and Herzegovina

A major business deal marked the beginning of Russian engagement in BiH, and it also became a solid base for Russian political influence in the country. In February 2007, Russia’s state oil company Zarubezhneft purchased majority stakes in Bosnia's sole oil refinery Brod, motor oil plant Modrica and fuel retailer Petrol - all located in BiH's Serb-dominated entity of Republika Srpska (RS) - for 121.1 million euro.

 

The relatively small investment, from Russia’s perspective, in the over-indebted and outdated complex (that yields no profit but keeps accumulating debt) enabled Russia to establish a firm political and economic grip with one of the most powerful local leaders – the RS strongman, that-time Premier and leader of the ruling party the Alliance of Independent Social Democrats (SNSD), Milorad Dodik. Despite the Brod refinery’s continued attraction of debt, Russia refused to consider selling or closing it because Russian officials were aware that such move would jeopardise Dodik's position in RS and subsequently their influence in BiH.[3]

 

Russia represented the biggest foreign investor in RS and the fourth in Bosnia and Herzegovina with the FDI around 547 million euro between 2005–2016, accounting to 3.3 % of GDP.[4]

 

Russian business interests focus mainly on the energy sector. Besides its investments in the Brod and Modrica oil industry, Russia has in recent years tried to engage in several other business deals in RS such as the purchase of company Energoinvest - Elektroenergetska oprema; negotiating the eventual construction of a hydropower plant at Mrsovo and  a new block in the Ugljevik thermal power plant and three accompanying mines. All these deals or plans have, however, failed due to the poor business climate in RS and other factors.[5]

 

As a result, the RS oil industry remains the only substantial Russian investment in BiH. On the list of foreign investors in BiH for the period 1994-2016, Russia remains in the fifth place with investments valued the total of 417 million euro. Nonetheless, the amount of this investment is almost insignificant compared to the countries that hold the first four places on the list; Austria (1.2 billion euro), Croatia (1.1 billion), Serbia (1 billion) and Slovenia (with 486 million euro).[6]

 

The only other business sector worth mentioning is BiH's export of fruits and vegetables to Russia. BiH profited from the fact that it did not join trade sanctions against Russia and in 2017 started exporting some of its agricultural products to the country. However, local governments and farmers have so far failed to exploit the huge needs of the Russian market and managed to export only limited amounts of produce. The total value of goods which BiH exported to Russia in the first eight months of 2018 was only 30.3 million euro which is  some 0.76 % of the total exports of 4 billion euro. According to these statistics, Russia was not even among the top 20 export destinations for BiH.[7] The aforementioned factors make Bosnia and Russia only small trade partners with the EU’s being Bosnia’s the biggest import and export market.

 

Kosovo

Economic activities between Kosovo and Russia since 2008 have been limited as a result of stalled bilateral relations caused by Kosovo’s independence and Russia’s refusal to recognise it and historically close ties between Russia and Serbia.

 

When looking at the data for the first half of 2017, Kosovo exported only limited amounts of goods to Russia and imported Russian products amounting to around 10 million euro, an insignificant volume compared to some 450 million euro imports from the EU.[8] The trade turnover with Russia was even smaller in previous years, but it thus seems to be on the rise.  Data from Kosovo’s Central Bank show that Kosovo imported goods worth 9.9 million euro from Russia in 2015, while in 2016 this figure increased to 12.4 million euro.[9]

 

An important point to mention is that FDI in Kosovo has marked a continuous drop since the declaration of independence in 2008 and Russia’s case has not been an exception.[10] Its investments in Kosovo amounted to 2 million euro in 2016, which represented only a small portion of overall FDI.[11]

 

Russia seeks to extend its economic influence in Kosovo through investments or donations to the Serb community living in the North Kosovo, where Kosovo’s central authority exerts only limited control. In 2011, for instance, media reports indicated that about 30 lorries with aid for the Serbs was sent to Kosovo from Russia. The convoy faced problems entering Kosovo’s territory because it failed to abide by the rules of Kosovo Customs.[12] Russia had also sent ten vehicles to the Civil Protection, an illegal Serb structure operating in the northern part of Kosovo.[13]

 

The energy sector is one of the key components of Russia–Kosovo cooperation. Kosovo does not have a refinery of its own, and its annual oil imports amounts to 650 million litres of oil.[14] Representatives of the Association of Kosovo Oil Traders observe that a high percentage of diesel which appears to comes from Serbia and Bulgaria, in fact, originates in Russia.[15]

 

There was also a political incident related to Russia’s involvement in the energy sector. In December 2016, Kosovo officials accused Marko Djuric, the head of the Office for Kosovo within the Serbian Government, of breaking the Kosovo government's sanctions against Russia by opening gas stations in Kosovo. The stations were run by a Serbian company linked to Russia's Gazprom Neft included on the list of companies and persons specifically banned from doing business in Kosovo or had their assets blocked.[16]

 

Macedonia

Compared to other Balkan countries, Russia has had a more limited economic footprint in Macedonia. Over the past years, however, Russia has attempted to exert greater economic influence in the country.

 

There are 78 companies in Macedonia that have at least 25 % of their shares owned by Russian entities. Even though the revenues of Russian companies have increased from 63 million euro in 2006 to over 212 million euro in 2015, “these companies make up a little over 1 % of the total revenues in the economy.”[17] The largest Russian energy company operating in Macedonia, Lukoil, which sells petroleum products, accounts for almost half of the revenue referenced.

 

Russian FDI in Macedonia amounts to less than 1 % of all FDI in the country. However, if we take into account third-party investments transmitted through tax haven countries, Russian investment in Macedonia is estimated to be around 4 % of total FDI.  The import of Russian goods accounts for 1 % of Macedonia’s total imports, while the export of goods to Russia accounts for 1.2 % of Macedonia’s total exports. Macedonia, like other WB countries, has a significantly negative trade balance with the Russian Federation. Total bilateral trade amounts to only around 100 million euro.

 

A major vulnerability for Macedonia is its energy dependence on Russia. Russia controls the TransBalkan Pipeline—the single gas route to Macedonia. Moreover, Macedonia has to pay among the highest price in Europe for its gas supply. The former Moscow-friendly government led by Nikola Gruevski sought to join the South Stream pipeline project as well as Turkish Stream. During the political crisis in Macedonia, Moscow blamed the West for attempting to overthrow Gruevski because of his “support of the South Stream and…the Turkish Stream.”[18] The South Stream line was ultimately cancelled by the Russian government in 2014, and a plan for the so-called Turkish Stream pipeline began the same year and remains in the construction phase.

 

Montenegro

Russia is the second single largest direct investor in Montenegro. According to the Montenegrin Investment Promotion Agency, in 2016 Russia was responsible for 52.8 million euro of  total FDI. By way of comparison, Serbia invested 25.3 million, Germany 16.7 million and the US only 5.6 million euro.[19] The data of the Statistical Office of Montenegro for 2015 show that 32 % of foreign-owned companies in the country belong to Russian citizens. Russian nationals also possess property throughout the country and significantly contribute to Montenegro’s travel and tourism industry. Thanks to the visa-free travel, Russians are the second most numerous visitors to the country after Serbians.[20]

 

Since Montenegro does not depend on Russian energy resources, trade between the two countries is not significant. In 2011, the share of exports attributed to Russia amounted to 1 % of total Montenegro exports, and in 2016 it fell to just 0.7 %. The share of imports from Russia was 1 % in 2011 and only 0.2 % in 2016.[21] When Montenegro joined the EU economic sanctions against Russia in 2014 over the annexation of Crimea, Russia introduced a trade embargo on agricultural imports. Moreover, in 2017, the Russian consumer rights and protection agency banned the imports of the Montenegrin state-owned wine company, Plantaže, because of allegedly poor quality.[22] The Montenegrin government argues that the ban was politically motivated because of its NATO membership.

 

Regardless of the limited trade between the two countries and Russian actions that stemmed from Montenegrin’s NATO accession, more than 28% of all foreign investments in Montenegro are Russian,[23] making it the largest direct investor. This high number was mainly due to the country’s biggest company, the Podgorica Aluminium Plant (KAP). It used to be part of the Central European Aluminium Company, owned by a Russian tycoon with close ties to Putin, Oleg Deripaska. However, the Montenegrin government initiated a bankruptcy procedure in 2014 after the KAP accumulated more than 360 million euro in debt. The plant once contributed to around 51 % of the country’s exports and about 15 % of its GDP.[24] A current court claim worth hundreds of millions euro launched in late 2016 by Deripaska against the Montenegrin government could cause serious financial issues for the country.[25]

 

When it comes to the energy sector, Russia has attempted to make itself a key player targeting, for instance, the mining sector and fuel market. In the latter case, a Russian energy corporation, Lukoil, acquired Montenegrin petrol station chain Roksped and succeeded in the expansion of gas stations throughout the country. Nonetheless, unlike its neighbours, Macedonia does not depend on Russian energy.

 

Serbia

Based on historically close ties between Russia and Serbia,  economic relations between the two countries remain on a more developed level, when compared to the other WB countries. There has been a definite upward trend in Serbia’s exports to Russia, which have increased by 352.7 % in value from 2005 to 2016 (from an admittedly low base).[26]

 

Russia lags behind the EU by a factor of ten, however, regarding Belgrade’s foreign trade, which amounted to just 6.7 % with Russia in 2016. This compared to 64.4 % with the EU in the same period.[27] Not even the refusal to join EU sanctions against Moscow helped Serbia to revitalise its economic cooperation with Russia. Despite this fact, opinion polls show that many Serbs mistakenly believe Russia is their biggest partner for trade, aid and military assistance.

 

The reality is that Russia exerts both direct and indirect control over about 10 % of the Serbian economy, primarily focused on key sectors such as energy and banking.[28] Similarly to other Western Balkan countries, Russia has come to dominate Serbia’s oil and natural gas market, a fraction of the overall economy, but one key to the country’s security. Serbia imports 75 % of its natural gas, all of it from Russia. Since 2008, Moscow has also been controlling domestic production after Serbia’s national energy company was sold to Gazprom for a below-market price.[29]

 

The central piece of Russia’s energy strategy in the region, the South Stream gas pipeline, was surprisingly abandoned in 2014.[30] According to Insajder’s investigation,[31] the bilateral agreement with Russia, the sale of Naftna Industrija Srbije (NIS) and Russia’s withdrawal from the South Stream project, left Serbia without an oil industry, oil and gas reserves, geothermal springs, and the 30 million euros it invested in the South Stream project.[32]

 

Russia has expanded its presence in the Serbian economy through not only corporate investment but also via direct government-to-government loans. During the Serbian fiscal crisis in 2012, Moscow offered Belgrade a 300 million dollar bailout amid tension with the IMF and extended its hand to Serbia’s banking, defence and railway sectors. Moreover, Russian companies employ around 2 % of the total labour force directly and around 5 % indirectly (around 70,000 people) primarily in a small number of industrial enterprises such as NIS, Beopetrol/Lukoil, Sberbank, and Srbijagas-related petrochemical and glass-making plants.[33]

 

Even though Serbia is an EU candidate country with more robust trade ties to Germany and Italy than Russia, the free trade agreement with Russia, signed in 2000, makes Serbia particularly attractive to foreign investors in the manufacturing sector. The Agreement stipulates that goods produced in Serbia which have at least 51% value added in the country, are considered of Serbian origin and are exported to Russia customs free.

 

 

 

China

China’s real economic impact in the five non-EU countries in Western Balkans remains low, except perhaps for Serbia, which enjoys a more robust economic relationship with the PRC. The perception, however, is widespread throughout the region of a significant Chinese economic presence, especially in terms of investment. At the same time, Chinese FDI outside of Serbia remains negligible. 

 

The discrepancy between quantifiable reality and public perception is not unique to Western Balkans; in fact, it is typical for Central and Eastern Europe as a whole. There seem to be several reasons for this curious gap between facts and impressions. 

 

Perhaps the most important one is the general confusion about the relationship between political and economic factors in the relationship with PRC. “Chinese Investments” have been hyped by the two major Chinese public diplomacy offensives, the “16+1” forum and Belt and Road Initiative (BRI). The rhetoric of these campaigns has been amplified by vocal parts of the local political establishments, influenced by Chinese propaganda and United Front tactics, including outright corruption, as documented in Macedonia. A politically motivated, persistent narrative of massive Chinese investments, driven by both Chinese and local actors, is rather easily mistaken for economic fact. 

 

Second, the overall lack of transparency in the economic relationship with China leads to common misperceptions. The capital inflows from China that do materialise are mostly not strictly speaking FDI, but rather loans from China’s policy banks like the EximBank with conditions like the mandatory use of Chinese contractors and labour. Similarly, the celebrated rise in trade hides the fact that the exchanges are highly skewed in China’s favour, with imports typically dwarfing exports by a factor of 10 - and in Serbia’s case, a mindboggling factor of 63. 

 

Finally, political factors sometimes reinforce each other to devastating economic effect. For instance, in Macedonia, tapes have been released with phone conversations between the PM and Transportation Minister on one side and the Chinese company Sinohydro on the other, discussing bribes in the tens of millions of euro. Sinohydro builds highways in Macedonia and elsewhere in Western Balkans, typically financed with China’s EximBank loans offered under unfavourable terms that would likely not be agreed to by less pliable local politicians. 

 

The financed projects and their often non-transparent nature led some foreign observers to express warnings against a possible “debt-trap”.

 

Bosnia and Herzegovina

China is still a relatively new "player" in BiH as it remains focused on Serbia and Croatia which are much bigger markets for its projects. This, and the fact that most Chinese business deals do not actually fall into the category of foreign direct investment, have contributed to the fact that China does not even make it on the list of foreign investors in BiH.

 

In terms of trade relations, BiH has very limited exports to China – only 59.1 million euro in the first eight months of 2018 - and somewhat more substantial imports, 441.7 million euro.  This means that China is among the top five countries exporting to BiH, amounting to 6.82 % of the total 6.5 billion euro of BiH imports.

 

However, like everywhere else in the Balkans, China seems to be advancing rather fast in BiH. It appears to be focused mostly on the energy sector. After the 16+1 Budapest summit in November 2017, the Bosnian electric power company, Elektroprivreda BiH, signed a 800.000 euro loan from China's EximBank to finish the thermal power plant in Tuzla. It was seen as the largest post-war investment in the country, but BiH experienced a set-back a few days ago when the consortium of Chinese companies that were supposed to implement the project (China Gezhouba Group Company Ltd - CGGC, China Energy Engineering Group, and Guangdong Electric Power Design Institute Co. - GEDI) announced they were withdrawing. The reason was that the Parliament of the Federation entity failed to approve the project for a full year. Accordingly, BiH became one of the first countries in the region where China pulled out from one of the capital projects.

 

Bosnia is still counting on China for at least four other projects: the thermal power plant Stanari, thermal power plants in Tuzla and Zenica as well as the Banja Luka–Mliniste–Split highway. In 2018, China Machinery Engineering Corporation and Emerging Market Power Fund are expected to invest into the thermal power plant Gacko 2 in Bosnia’s Serb-dominated entity, Republika Srpska. Some experts say that the focus of Chinese companies on construction of thermal power plants in BiH and elsewhere in the region is a result of China’s strategic priority of  gradually switching to "cleaner" technologies domestically and to export its older, "dirty" technology, equipment and know-how elsewhere.

 

Kosovo

Similar to the case of Russia, China has not recognized Kosovo’s independence. Despite the fact that over the past several years China has been increasingly courting Balkan countries with investments, economic activities between Kosovo and China thus far continue to be insignificant.

 

Kosovo is even excluded from Chinese initiatives. For example, in 2014, when the annual Economic and Trade Forum between China and 16 countries of Central and Eastern Europe, called the 16 + 1 Initiative, was held in Belgrade, Kosovo was the only country in the region not invited to attend.

 

Macedonia

China’s economic influence in Macedonia has been growing steadily, but not rapidly. This year, China has become Macedonia’s seventh largest trading partner, despite not having been among the ten biggest trading partners ever before.[34] Total trade turnover between the two countries in the first eight months of 2018 amounted to 316 million dollars. Compared to 2017, exports have been decreasing, while imports have been on the rise, which increased Macedonia’s trade deficit to China by 42.2 %. The deficit now stands at 237 million dollars.[35]

 

Prospects of continued Chinese economic influence in Macedonia are mixed. The corruption scandals surrounding the construction of the two Chinese highways in the country has not interfered with China’s plans for involvement in other infrastructure projects. For example, Prime Minister Zaev announced that in 2018, the government plans to invest more than 272 million euro in infrastructure projects.[36] According to a statement by the Ministry of Transportation, a significant portion of this investment is likely to be financed with a loan from a China’s EximBank.[37]

 

Finally, like most of the projects within the Belt and Road Initiative, highways carry a significant risk of economic unsustainability for the indebted economies of the Western Balkans. The stipulations of the highway contract with Macedonia have made China immune to incurring any costs from performance shortfalls, and provides sole legal jurisdiction for determining the efficiency of the construction (carried out almost solely by Chinese workers) -to Chinese courts.[38] In fact, Macedonia has already been forced to incur large-scale debt in order to finish the construction of the highways, which could add Macedonia to an already sizeable list of countries in different parts of the world that have fallen into this so-called “Chinese debt trap.”[39]

 

Montenegro

Economic cooperation between Montenegro and China is relatively new and focuses primarily on the development of infrastructural projects along the lines of several initiatives, most importantly the ‘16+1’ summit and the One Belt and One Road Initiative (OBOR).

 

The bilateral cooperation between China and Montenegro is at a low level. According to the data of the Montenegrin Investment Promotion Agency for 2016, China invested only 441,000 euro in FDI and it is positioned in 47th place, followed only by Belize and Bulgaria. This is not surprising as China’s primary focus is on loans and not FDI. The current debt to China is at around 800 million euro.[40] A number of Chinese financial initiatives are far from transparent and, at times, it is hard to know if China is interested in making investments, loans or providing grants.

 

The largest Chinese projects in Montenegro are: a) the railway track connecting the city of Bar with Belgrade, b) a highway between Montenegro and Albania and c) the construction of the Podgorica-Kolašin motorway section.[41] One of the biggest lenders is the Chinese EximBank, which in 2014 extended Montenegro a loan of over 800 million euros to build the Podgorica-Kolašin highway and the China Road and Bridge Corporation (CRBC), the large state-owned Chinese company, which is building the first section of the Bar-Belgrade highway.[42]

 

China is interested in expanding to Montenegro and the whole region since it sees it as a major transport corridor, connecting the Mediterranean to Central Europe via the Piraeus port and the “Land-Sea Express”. The region also provides opportunities for the Chinese government to invest a certain amount of excess capital, production and construction capacities.[43] As Montenegro has direct access to the sea, it could serve as an entry point into Europe from the Adriatic, which would be invaluable for China once Montenegro becomes an EU member.

 

Serbia

Serbia stands out among the five countries as having a more significant economic relationship with China, reflecting its unusually close political relationship with both, the governing party and the opposition.

 

Overall, China is Serbia’s third-largest import partner, slightly behind Germany and Italy. Since the establishment of a Strategic Partnership in 2009, the Serbian government has made an effort to positions itself as a transit country for Chinese goods from Southeast Europe to Central Europe.[44]

 

Chinese “investments” mostly take the form of M&As, largely through acquisitions of underperforming former state-owned companies. Some experts[45] consider the Chinese as the only ones who can invest a large amount of money in a short period of time into indebted industrial giants that were considered as  “black holes” of the Serbian economy.[46]

 

China has already invested more than 1 billion dollars to finance the building of transport infrastructure and energy projects in the country. [47] Although the metal and energy industries have remained China’s primary sectors for investment in the country, Chinese capital has gradually diversified into sectors such as transportation, technology, the automotive industry.

 

Chinese investment credits are attractive to local leaders due to low interest rates and the fact that China has not established explicit EU-style political conditionality on aid. However, the nature of Chinese investment is almost exclusively acquisitions, construction contracts and loans with special conditions (e.g. Chinese contractors, low interest rates, job creation and skills development, the transfer of knowledge and new technologies etc).

 

Chinese policy banks have also been extending loans to various infrastructural projects, notably the Serbian section of the Belgrade-Budapest high-speed rail. Last year in Beijing, the Minister of Construction, Transport and Infrastructure signed an agreement on a 297.6 million dollar loan with the Chinese EximBank to finance the reconstruction and modernization of the first section of the railway from Belgrade to Budapest.[48] One of the Chinese firms was also hired to build the Obrenovac-Ub and Lajkovac-Ljig sections of the motorway, financed with a 296.5 million euro loan from the EximBank.[49]

 

In the same year, China’s Zijin Mining won the tender to become a strategic partner in Serbia’s sole copper complex RTB Bor, pledging to invest 1.26 billion dollars in return for a 63% stake. The company also promised to settle RTB Bor’s debt and keep employed all 5,000 workers. Some experts have warned, however, that the government’s deal with Chinese company is not a good solution because Serbia has no strategic control over decision-making in the company.

 

Serbia has also gone furthest in accepting Chinese participation in its telecom and IT infrastructure, especially after the election of the Prime Minister Ana Brnabic government in 2016 which made digitalisation its top priority and enthusiastically joined the “Digital Silk Road”. In contrast to many western countries, Serbia harbours no security concerns in this area.

 

In 2014, the Ministry of Interior signed a memorandum of understanding with Huawei allowing the company to take part in MoI projects on establishing System 112 - emergency numbers for the police, fire services and emergency cases.[50] The same year Huawei donated a 4G IT laboratory to the electronic engineering college of the Belgrade University as an expression of support to the Serbian system of academic education and to help create new IT research and development centers.[51] The company announced in October 2016 a plan to invest 150 million euro in modernising the existing fixed network of Telekom Serbia.[52]

 

In line with the implementation of the Memorandum of Development of Information Silk Road, the government signed two agreements on strategic partnership with Huawei. Huawei has engaged in strategic cooperation with multiple Serbian ministries, major businesses, and municipalities in the ICT sector, working on potentially sensitive projects like national broadband, safe city, smart education, smart grid, and smart city domains. Additionally, Serbian government has announced in 2018 that a new IT centre, i.e. the Serbian-Chinese industrial park in Belgrade will be built by China Road and Bridge Corporation (CRBC).