Phil Cain in Graz, Austria -

Turkey, the historic foe of many Balkan people, is set to play an increasingly important role in the region, according to Bert van der Vaart, founder and chief executive of SEAF, an investor in small business in the region.

The Muslims of Albania, Bosnia and Kosovo are generally at ease with Turkish influence, but others have deep misgivings about the nation that lorded it over them for centuries. Most would far prefer to see stronger political and economic ties with Western Europe.

Whatever their preferences, van der Vaart says the reality is that Europe's role will decline in the Balkans compared to Turkey's, and so SEAF is currently discussing the creation of a joint venture with a Turkish investment company to raise a fund to invest in the Balkans, as well as the Caucasus and Turkey itself.

The Balkans, van der Vaart says, is simply too small to grab the sustained attention of either Western Europe or Russia. Balkan businessmen cannot allow themselves to be blinded by traditional emnities, says van der Vaart: "Entrepreneurs have to work in the here and now."

Van der Vaart also sees signs that the deep divisions created by the bloody break-up of Yugoslavia in the 1990s are closing up. "The whole market is re-integrating. They may not particularly like it, but some of our Serbian businesses are doing business with Croatian ones. I completely believe in former-Yugoslavia as a market."

FDI blues

For small- and medium-sized enterprises (SMEs), van der Vaart says, the biggest problem since the economic crisis has been the collapse of foreign direct investment (FDI) after Austrian and Italian banks reined in lending. With foreign banks controlling around 90% of the region's banking assets, this was no small matter. "While SMEs really rely on FDI, the truth is that it starts from zero every year," van der Vaart says.

For investors like SEAF, which largely relies on realising its investments through trade sales, management buyouts and the occasional sale to financial investors, the fall in FDI has also meant its exit path has slowed. Nevertheless, the downturn is not all bad: "We have to be more careful than in 2001. But if you have money, then there are a lot of investment opportunities to pick up."

SEAF started shortly after the sudden fall of the Berlin Wall in 1989. Van der Vaart remembers recognising the need for SME funding on a trip to Poland shortly after. "It was clear that what was needed were a whole lot of SMEs. When I looked at the menu in a restaurant, I noticed there were three listings for cheese: one 100g, one 200g and another 400g. That, I thought, is a failure of SMEs."

Within three years of this meal, van der Vaart had started SEAF's work in Poland and Bulgaria, stepping into former-Yugoslavia later because the series of wars had "roiled the entire situation." Bosnia-Herzegovina was the first former-Yugoslav country considered. The European Bank for Reconstruction and Development sought SEAF's opinion after three years of war came to an end in 1995 with the signing of the Dayton Accord. "But there was so much donor money going into Bosnia and so much distortion of the local market that we just didn't find it a suitable time to go in," van der Vaart says. Instead, SEAF's first investments in former-Yugoslavia were made in Macedonia in 1998.

The situation in Bosnia is, sadly, little better today, 15 years after the first assessment. "The whole business culture has been distorted by donor money. If you give someone a loan, then they think, 'That is great'. But if you give them a grant, then they think, 'That's even better!'" van der Vaart explains. "Serbia is different. It is a much better place to invest."

Kosovo suffers from the distortion of donor money too, having found itself under the wing of the international community since 1999 when a Nato bombardment drove out Serbian forces terrorising the Albanian population. "We see entrepreneurs in Kosovo, but the legal regime is not there."

And corruption, without mention no article on the Balkans is complete? "You shouldn't be surprise if an official wants to participate in some way - politicians and civil servants are paid a lot less than in the West," he explains, adding that corruption is more of a problem at the larger level, like in telecom firms or banks; when SMEs have trouble, it usually concerns licences. "In Uzbekistan, we have had to tough it out and wait, but it is overestimated in the Balkans."

Turkey may be waiting in the wings to play a larger role in the Balkans, but it is the prospect of EU integration that drives political debate and reform. From a business point of view, however, there has been little practical benefit since the flood of FDI peaked around 2005, according to van der Vaart. "The most important thing was liberalising visas to travel to the EU, everybody has appreciated that."