Serbia and Germany put history behind them

By bne IntelliNews February 10, 2010

Nikolai Frank in Berlin -

Soldiers of the Bundeswehr may still be patrolling Kosovo and the two country's football teams drawn in the same World Cup group, but that hasn't stopped German businesses from thriving in Serbia and trade between the two countries from booming.

A German business delegation in Belgrade at the end of January included some big names: Volkswagen, RWE, Siemens, Deutsche Bank, Deutsche Telekom and BASF. While their talks with Serbian business leaders and officials produced no headline-grabbing deals, the meeting gave momentum to ongoing negotiations. These include the acquisition by Deutsche Telekom of a further stake in Telekom Srbije (it already owns a minority stake through Greece's OTE); the construction of hydroelectric power stations by RWE; and Volkswagen's interest in building a plant in Serbia.

The visit was only the most recent public demonstration of growing commercial ties between the two countries. During the 1990s, civil war and international sanctions impeded trade and foreign direct investment (FDI). But with the ousting of Slobodan Milosevic in 2000, trade rapidly picked up. Prior to the current economic crisis, annual bilateral trade had reached €2.5bn, making Germany Serbia's second-largest trading partner after Russia and its second-largest export market after Bosnia-Herzegovina.

FDI has been an important growth factor for Serbia in recent years and German companies haven't been absent. Recent examples include Henkel, a leading producer of domestic and cosmetic products, which has invested over €70m and is expanding its Serbian base into a regional hub; and Draxlmeyer, which has outsourced the labour-intensive production of electronic components for cars to Serbia.

With its established industrial base, skilled-yet-affordable labour force, free-trade agreements with many countries in the region (particularly Russia) and proximity to Central Europe, Serbia is an attractive investment destination for German companies. According to the German Business Association in Belgrade, German firms surveyed in Serbia consistently reply that they wouldn't have rather invested elsewhere.

The country lags behind, say, Croatia in the modernisation of industry and infrastructure – both areas that afford great opportunities for Teutonic engineering expertise. Another sector set to grow is energy. One-third of Serbia's electricity already comes from hydropower and the opportunities for further investment are huge: primarily on the mighty Danube, which already has two dams, and on the Drina in the mountainous west of the country. Serbia is also at the heart of the region's electricity network – a remnant of Yugoslav central planning – placing it in a good position for the expansion of its production capacity and the modernisation of the grid.

In this regard, the memorandum of understanding signed between RWE and Serbia's power monopoly EPS last Novemberb on the construction of three more hydropower stations with a combined capacity of 3,000 MW is significant. The €5bn project will be a litmus test, believes Michael Schmidt, head of the regional German chamber of commerce and a former advisor to the Serbian government. "A project of this kind can do a lot to create confidence in the country for investors," says Schmidt. "But Serbia has to establish the necessary legal and political framework in order to become a serious player on the regional energy market. Turning around the loss-making EPS will require raising tariffs, which in turn will create the capacity and the drive to invest in energy efficiency and expansion."

Don't look back in anger

The growth of commercial ties between Serbia and Germany comes despite a troubled history. Leaving aside the brutal Nazi occupation, the memory of more recent German interference in the region is very much alive for Serbs. Germany's vindication of the right to self-determination for its historic allies Croatia and Slovenia precipitated the collapse of Yugoslavia and the outbreak of civil war. In 1999, Germany then joined in the controversial Nato bombardment of rump-Yugoslavia and the invasion of Kosovo, where it retains 2,200 troops to this day.

History notwithstanding, analysts believe Serbia has an ally in Germany. It was partly thanks to German pressure that, last December, EU states agreed to unfreeze an agreement which will further liberalise trade between Serbia and the bloc. Germany was also a proponent of the measure to lift visa restrictions into the EU for citizens of Serbia, Montenegro and Macedonia, which was passed the same month.

Yet however much good will there may be, in another sense Germany is standing in the way of progress in Serbia. Quite apart from the voluminous legislative criteria, Serbia's aim of EU membership ultimately hinges on a settlement of its relationship with Kosovo, whose independence has been recognised by the vast majority of EU member states (including Germany), thereby diminishing Belgrade's room for manoeuvre. What such a settlement might look like remains unclear, says Cornelius Adebahr of the German Council on Foreign Relations: "The question is theoretically open but in practice not really, since the 23 EU member states are not going to withdraw their recognition of Kosovo as an independent state."

German intransigence on this matter will remain a complicating factor, as the country is a key driving force in the EU enlargement process. In the meantime, Serbia needs all the support it can get to help find a compromise solution on Kosovo – not only for its own sake, but also that of the entire region.

The hope is that politicians on all sides will demonstrate as much pragmatism and thirst for results as their counterparts in business are doing.

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