Restraining Serbia's eastern expectations

By bne IntelliNews March 15, 2010

Ian Bancroft in Belgrade -

Despite the heady optimism that accompanied Russian President Dmitry Medvedev's visit to Serbia last October during celebrations to mark the 65th anniversary of Belgrade's liberation by the Red Army, the six months since have been marked by a bout of wintery cold realism regarding Serbia's eastern prospects.

Though often stated as a prime factor behind Fiat's sizeable investment, which could include building a model for the Chrysler brand when production starts in 2011, Serbia's much-vaunted free trade agreement with Russia remains unratified by the Russian parliament, the Duma. Moreover, as Ivan Jaksic, spokesperson for the Serbian Chamber of Commerce, tells bne, the establishment of a customs union between Russia, Belarus and Kazakhstan on July 1 will provide "a new challenge to export-oriented companies in Serbia and to the economy in general," making the conclusion of a free trade agreement with Kazakhstan an even greater imperative.

Serbia continues to run a trade deficit with Russia, with the vast majority of imports - some 80% - comprised of energy-related products. As Jaksic emphasizes, the ability of Serbia's exporters to fully realise the benefits of free trade has been inhibited by "uncompetitive prices, disorganized producers, expensive transportation, a lack of familiarity with the Russian market, particularly amongst small and medium enterprises, an unreal exchange rate and an absence of stimulation for exports to this market."

With respect to energy, controversy persists over Gazprom's opaque and cut-price acquisition of Serbia's national oil company, Petroleum Industry of Serbia (NIS), particularly concerning the deal's legal aspects, the repayment of NIS's outstanding debts, and the posting of losses for both 2008 and 2009.

As Zarko Petrovic, research director at the International and Security Affairs Centre (ISAC) in Belgrade, stresses, "Russia is primarily interested in financial gain for its state-owned companies in the Balkans. However, some Serbian policymakers read this in a way that implies 'Russia's geo-strategic return to the Balkans'. In order to profit, Russia over-emphasizes energy and its energy relationships with Serbia. It offers to make Serbia a regional leader in energy production, although it is unclear how genuine or how feasible that option is in light of Russia's realistic potential."

Joining the nuclear family

After failing to acquire the utility Electric Power Industry of Serbia (EPS), which looks as though it will remain in state hands for the foreseeable future, Russia has shifted its attention to the nuclear sphere. Though Serbia is maintaining its moratorium on building nuclear power plants, fears of future energy shortages, combined with developments elsewhere in the region - particularly Italy's plans to construct a nuclear plant in Albania and Russia's prior involvement in Bulgaria's nuclear sector - continues to soften domestic opposition to nuclear energy.

Indeed, an agreement to repatriate spent nuclear fuel from the Vinca Institute of Nuclear Sciences on the outskirts of Belgrade to Russia is widely perceived as an attempt to allay lingering environmental and safety fears. But with any nuclear plant at least 15 years away, alternative energy sources, particularly hydroelectric power, remain a more realistic Russian interest in the near term.

That Russia's ambassador to Serbia should publicly announce discussions about the possible construction of a nuclear plant on the day that Serbia secured visa liberalization and the EU unfroze the Interim Trade Agreement only "adds to the perception that Russia is over-emphasizing energy... in order to maintain its influence in Serbia," says ISAC's Petrovic.

The recent establishment of a joint venture, Renaissance Citadel, by Moscow-based investment bank Renaissance Capital and Citadel Investment Services Group, a leading Belgrade-based investment bank, suggests that Russia recognizes the need to diversify into alternative market sectors. Renaissance Capital, whose previous clients include Gazprom, lists metals and agriculture as some of their prime areas of interest.

Though Serbia's deepening ties with Russia continue to be justified in terms of energy security - especially future participation in the South Stream gas pipeline project, which Croatia also recently joined - expectations about potential regional energy leadership have been dampened somewhat by the experiences of the past six months. The manifest competitive shortcomings that prevent Serbian companies from fully exploiting free trade with Russia, meanwhile, will continue to constrain access to global export markets; particularly those of the other BRIC countries, which are often posited domestically as viable alternatives to European integration.

Whilst key partners such as Russia do provide considerable sources of optimism for any economy struggling to entice foreign capital, experts stress that Serbia should be careful to restrain its eastern expectations from overly influencing - and even determining - its economic and energy policies.

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