A first journey into the heart of Balkan transition awaits many of the bankers, businessmen and government officials preparing to descend on Belgrade for the European Bank for Reconstruction and Development’s May 22-23 annual meeting and business forum.
They are due to arrive just as Serbia’s brief spring gives way to an early summer heat that will roast the capital’s concrete core. Belgrade is the eternal hothouse of Balkan business and politics; it is where central and eastern Europe’s economic transition looks south. Belgrade lies at the very southern edge of the Banat plain, which links northern Serbia to neighbouring Hungary, culturally and economically. It also marks the northern frontier of the Byzantine world in this corner of Europe, with Greece just a day’s drive away.
Regional power base
Though it is no longer the capital of Yugoslavia, the defunct federation scrapped for good in 2003, Belgrade remains a leading business centre and political power base, setting the tone for reform efforts throughout the western Balkans. This region, comprising the former Yugoslavia and Albania, was held back for years by the Serbian rule of Slobodan Milosevic, before his neo-communist regime collapsed in a popular revolt half a decade ago. It is now bursting out of the gates, with Balkan countries competing alongside the sprightlier Baltic states to foster Europe’s fastest-growing economies. Serbia achieved 8% growth in GDP last year, by some estimates, just a hair behind Estonia. The prime minister, Vojislav Kostunica, proclaims himself “more than confident” that Serbia and the surrounding region have left behind the grief and instability of the turbulent 1990s.
On track to EU
The European Commission, on April 12, placed Serbia and Montenegro on a preliminary track for membership of the EU, agreeing to launch negotiations on a “stabilisation and association” agreement.
The move indicates that leaders across Europe share Mr Kostunica’s confidence in the basic reforms forced through so far. It also highlights a growing international confidence that the country’s oft-divided reformers are united enough to keep Serbia on course, replacing Mr Milosevic’s poisonous blend of crony capitalism and old-style socialism with a more viable, flexible market-based economy.
Standard & Poor’s last month affirmed its B+ long-term and B short-term sovereign credit ratings for Serbia after the country issued a $1.02bn bond, concluding a debt-rescheduling deal reached last summer with the London Club. This allowed a 62% write-off of Serbian debt to the group of creditors, paving the way out of financial isolation. “A huge surge of interest has followed the London Club deal,” says Jasna Matic, director of the Serbian Investment and Export Promotion Agency. Among the swiftest to act have been European banks, now rushing into the Serbian market through a series of acquisitions. Italy’s Banca Intesa in February agreed to buy Delta Bank, Serbia’s second largest bank with €690m of assets, paying €277.5m cash for 75% plus one share. Adding Delta Bank to a network of investments in the region, from Croatia to Slovakia, Banca Intesa executives noted the purchase was justified by “confidence in the process of legislative, social and economic development in Serbia”.
Greek banks are also entering the fray, with Alpha Bank scooping up 89% of previously state-owned Yubanka, the seventh largest bank, and Piraeus Bank purchasing Belgrade-based Atlas Bank. They join the National Bank of Greece, long present in Serbia.
Scheduled privatisations of other banks – such as Vojvodjanska, Novosadska, Continental and Niska – look certain to boost further the presence of European institutions through this year. Their influence is already significant, with Austria’s Raiffeissen Bank having established itself as the country’s largest bank, while compatriot Hypo Alpe-Adria Bank quadrupled its assets during 2004, joining France’s Société Générale on the sector’s leaderboard.
The sharp growth of foreign direct investment in the banking sector echoes the FDI boom experienced in Serbia’s real sector two years ago. Privatisation receipts in 2003 exceeded €1bn, with most of the revenue coming from three deals. Serbia made €605m by selling controlling stakes in its largest cigarette-rolling plants to Philip Morris International and British American Tobacco (BAT). Lukoil, the Russian oil giant, meanwhile bought Beopetrol, the country’s second-largest retailer of oil products, for €207m.
Fortunes turned around
As the influx of cash and expertise helps once-ailing industries off their knees, there is no more dramatic example than US Steel’s takeover of the bankrupt Sartid steelworks.
Worth $250m, the deal appeared shaky at the start when workers downed tools and Sartid’s European creditors complained that state officials had failed to consult them adequately during bankruptcy procedures. But complaints soon diminished as the Pittsburgh-based steelmaker, the US’ largest, became Serbia’s leading exporter, having found synergies with US Steel’s plant in nearby Slovakia and benefiting from high steel prices.
Thomas Kelly, US Steel Serbia’s general director, now promotes Serbia as “the next big thing,” hawking a simple message for potential investors: “Go at it as you would in any other country where you want to set up a company. It will work.”
US investors are leading the way, with Austria, Greece and Italy not far behind. Along with the entry of US Steel, BAT and Philip Morris, Ball Corporation of the US has undertaken Serbia’s largest greenfield investment project, building a plant for manufacturing aluminium cans.
Still, Predrag Bubalo, Serbia’s minister of economy, calls the current level of foreign investment insufficient. “Bank sales in 2005 could make this a record year,” he says, but in the same breath adds: “This is not enough.”
Despite its strong growth and the glut of new investment, Serbia’s economy is emerging as a hybrid creature, split between its market-oriented parts and a socialist-era core.
Throughout the Balkan region, transition has come first and foremost in a fast-expanding private sector. A growing portion of this is being reactivated and renewed by foreign investment, while another portion is characterised by dynamic and competitive home-grown businesses – frequently in agro-industry and light manufacturing.
Liberal economists applaud such successes but warn these are taking place in the shadow of heavily subsidised, state-owned industries that are dragging the economy down. These require urgent restructuring and, in some cases, are stumbling toward bankruptcy.
Transition pains
Danica Popovic, an economist at the University of Belgrade, says the state’s failure to restructure big industries only prolongs the agony of transition. “It is as if, in an operation, you opened the abdomen and then you stopped,” she says.
Mr Kostunica also believes the waiting must end. He has promised to restructure many of the biggest state-owned companies, including the railways, power company, national airline, fixed-line telecom, oil and gas company and postal service.
Yet in an economy where the state still pays the majority of wages, where official rules and common practice remain conspicuously out of kilter and socialist-era red tape is the norm, liberal economists feel justified in questioning the government’s will to enact far-reaching reforms. “It all comes down to political will,” says Mrs Popovic.
Mladjan Dinkic, the finance minister and the leading economic reformer in Mr Kostunica’s cabinet, smarts at such criticism. As a former central bank governor, Mr Dinkic is widely credited with restoring Serbia’s financial stability, building confidence in the once-flimsy currency, the dinar, daring to close insolvent banks and helping depositors recover lost funds by issuing bonds. As finance minister, he takes credit more recently for the introduction of the new 18% value-added tax that this year has boosted state revenue and initially halved Serbia’s foreign trade deficit.
Calls for reform
Yet some of the strongest criticism comes from the institution that Mr Dinkic rebuilt nearly from scratch in the ruins of the Milosevic era, the central bank. Radovan Jelasic, the current governor, once a protégé of Mr Dinkic, is among those campaigning openly for deeper reforms in the public and private sectors, challenging the government and winning enthusiastic backing from the private sector.
“The concept of patching up the economy and standard of living through monetary and foreign exchange policy, while sitting idly and observing the inefficiency, abuse of monopoly status and – to be entirely honest – significant political influence in a large number of public companies, cannot and should not be allowed. It is fully unsustainable,” Mr Jelasic says. “The time has come for all of us to stop for a moment and ask ourselves whether anything real is being done today.”
Strikes within state-owned industries – for example at JAT Airways, the national airline – are increasingly challenging Mr Kostunica’s government to make a choice: either to prop up faltering companies or to let them fold. Ministers face an uphill battle arguing that Serbia, a country of 10 million people, can sustain an airline that was initially founded to serve the much-larger Yugoslav federation. And attempts to rejuvenate the sputtering Zastava motorworks, maker of the Yugo discount car (once an internationally-recognisable brand) stalled last year for want of a willing investor.
A new law on bankruptcy procedure may point the way forward. But the government will be keen to avoid better co-ordinated action by Serbia’s politically powerful unions. They played a central role in toppling Mr Milosevic, and hold considerable clout in a country where “Yugonostalgia” runs deep. Most citizens still pine for the certainties of full employment.
Mr Kostunica’s government maintains a precarious grip on power, which complicates matters further. Elected a year ago, the prime minister has cobbled together an odd three-party coalition comprising his Democratic Party of Serbia (DSS), the liberal economists of Mr Dinkic’s “G17 Plus” party and the monarchists of the Serbian Renewal Movement, led by foreign minister Vuk Draskovic. Together they control a minority of seats in the parliament but hold on to power with wavering support from a handful of liberal democrats and ultranationalists.
However, publicly the coalition is optimistic; Mr Draskovic offers a bullish prediction on Serbia and Montenegro’s chances of joining the EU by 2009. “Even after all these wars we have an advantage, compared with Bulgaria and Romania. Because our diaspora is so enormous, we have right now more citizens employed in the EU and US than we have citizens employed right here in Serbia. For them, transition is completed already,” he says. “We are a political bridge between Europe and Asia, between the Balkans and Russia, at once an Adriatic state and a Danube state. We can move quickly toward the EU if we only try.”
Yet Mr Kostunica’s biggest success, after winning the EU’s cautious favour and securing a write-off of international debt, has been to stay in power this long. His willingness to co-operate quietly with the International Criminal Tribunal for the former Yugoslavia, in The Hague, infuriated the ultra-nationalists of the Serbian Radical Party, who control more parliamentary seats than the prime minister’s own DSS.
So long as Serbia’s greatest challenges remain territorial, issues related to nationalism will not disappear. The western Balkan region is steeling itself to address bitter disputes left unresolved after a decade of fighting and international isolation.
Kosovo, Serbia’s breakaway province of two million people, dominated by ethnic Albanian pro-independence forces after a 1999 war, is on the agenda as the province’s United Nations administrators and Nato peacekeeping forces seek a way out. Kosovo remains a hotbed of ethnic tension, where rioters looted and burnt Serb communities and religious sites on a massive scale only last year, in the presence of UN police and Nato soldiers. “All that has happened in Kosovo since June 1999 has been a failure,” says Mr Kostunica, capturing the sullen mood most Belgraders fall into at the mere mention of the province.
Montenegro talks
Adding to the unease, Montenegro’s leaders are to hold a referendum on splitting from Serbia next year, potentially collapsing the two republics’ post-Yugoslav union. Meanwhile, the future of Republika Srpska, the Serb-dominated parcel of Bosnia-Herzegovina, hangs in the balance.
Such acute political risks still threaten overall stability in Serbia and the surrounding region. But the volume of foreign investment now arriving in the country indicates that, at last, the potential benefits have begun to outweigh the risks.
