Clare Nuttall in Bucharest -

Poor, undeveloped and struggling to recover from last year’s devastating floods, Bosnia & Herzegovina has little to cheer about right now. But if plans to develop the energy sector come to fruition, Bosnia could act as a significant energy exporter to Italy and other European countries, and start attracting the kind of foreign investment crucial to stop this country from sliding back into ethnic strife.

While Bosnia is still a long way from EU entry, Bosnia is looking to boost integration with neighbouring states to attract more investment. Its top sources of foreign direct investment (FDI) have consistently been EU countries together with neighbouring Serbia, according to the Foreign Investment Promotion Agency of Bosnia and Herzegovina (FIPA). Although there has been a slight slowdown in FDI inflows in the last two years, Bosnia is among several countries on the fringes of Europe that has emerged as a low-cost manufacturing destination serving richer EU markets.

“Historically, when we look at movements of FDI in Europe, it moved from one accession country to another. Now we are on the front line, with more than 1,000 kilometres of border with the EU,” says FIPA director Jelica Grujić. “We are in the transition period of adopting EU rules, but in the meantime, we can offer competitive advantages, especially in the regions close to the border with very good transport connections. Operational costs including electricity, telecoms and other utilities are much lower not only than in the EU, but also than in neighbouring countries.”

However, as in countries across Southeast Europe, Bosnian exports have been affected by the slowdown in the Eurozone. Croatia in particular is an important trading partner and its failure to exit recession has had a knock on effect on Bosnia, Erste analyst Alen Kovac told bne IntelliNews in late 2014. The economy was also hit by catastrophic flooding in May 2014, though it is now recovering, with GDP expected to come in at 1.5% this year, according to the World Bank’s Global Economic Prospects report released on January 13.

There are, however, obstacles to overcome, in particular those connected to the small size of the Bosnian economy and perceptions of risk. Delays in forming a new national government after the October 2014 elections have reinforced this, and are likely to result in delays to important decisions in area such as privatisation and infrastructure investment. In January, local media reported that the International Monetary Fund will delay the disbursement of a new loan tranche under its stand-by agreement with Bosnia because of the lack of reform.

The organiser of the annual Sarajevo Business Forum, Bosnia’s first Islamic lender Bosna Bank International (BBI), has been working for several years to bring in more investors. “We are looking at this from several angles – we want to bring in investors and increase cooperation both within the country and in the region, but it’s a process because Bosnia is perceived as a high risk zone. It’s not easy to change an image but that’s what we are trying to do,” BBI’s CEO Amer Bukvić tells bne IntelliNews.

One of the forum’s aims is to help Bosnian companies work with those from Croatia, Macedonia, Serbia and other former Yugoslav countries. “The Yugoslavian economy was built as a single country, economically it was one zone. We have a lot to benefit from in terms of regional cooperation and there is huge potential from reviving this zone,” Bukvić says. “There’s a natural economic bondage within the region.”

He cites examples such as tourism, where tours could be packaged across several countries, and agriculture, in order to take advantage of synergies between different countries with different climates. Better infrastructure is also needed; the expected opening of a highway crossing the Balkans from Bosnia to Hungary is already expected to boost tourist numbers.

FIBA’s Grujić agrees that Bosnia would benefit from regional integration. “Not just Bosnia & Herzegovina, but all the former Yugoslavian countries are too small to be interesting to huge investors,” she says. “We need to start considering the Balkans as a region in the same way that investors do. For example, if a huge investment is made in Serbia, suppliers may come to Bosnia. I hope the Balkans region will attract more foreign investments and that we will take our piece of the cake in that process.” 

Energised

Bosnia’s share of the regional cake could get considerably bigger, if and when plans to develop the country’s energy resources come to fruition. The authorities in the Muslim-Croat autonomous Bosnian Federation are expected to open talks with a unit of Royal Dutch Shell on a concession for the oil major to carry out exploration works. According to Reuters, Shell could invest between $300mn and $700mn in exploration work in Bosnia. The agreement is expected to be concluded in the autumn, paving the way for drilling to start next year.

Along with Bulgaria, Bosnia is already one of the most important electricity exporters within Southeast Europe. Despite obstacles to investment in the highly-regulated power generation sector, interest in developing its under-utilised hydropower potential is growing.

The head of the European Bank for Reconstruction and Development (EBRD) office in Sarajevo, Ian Brown, tells bne IntelliNews that Bosnia has “great potential” for utility-scale hydropower, though notes that as in other countries new hydropower plants take a long time to develop and build. Again, this hinges on cross-border cooperation – many of the larger hydropower plants Sarajevo wants to see built are on the Drina river along Bosnia’s border with Serbia.

Construction of a 415km subsea power cable from Montenegro to Italy will open up new opportunities for exports. The cable, from Tivat to Pescara, will enable Montenegro and other Balkan countries to supply the Italian market, while Italy is looking to become a power hub to distribute power on to third countries. When the cable comes into operation in 2017, and new power lines from Montenegro to Bosnia and Serbia are completed, Bosnia will be able to export directly to Italy.

“At the moment, the market for Bosnian exports is limited and there is sufficient capacity in the region to meet existing demand,” says Brown. “However, the Italian market is on a different scale from the markets of the western Balkans, and the under-sea cable will be a game-changer for the Balkan energy market.”