Serbia risks losing Russia trade as it moves towards EU

Serbia risks losing Russia trade as it moves towards EU
By Ivana Jovanovic in Belgrade November 2, 2015

Russian Prime Minister Dmitry Medvedev indicated on October 30 that Serbia will lose its free trade agreement (FTA) with Russia when it joins the EU. Medvedev’s comment followed the three-day visit to Moscow by his Serbian counterpart Aleksandar Vucic, which yielded relatively little in economic terms although Russia will continue its political backing for Serbia over Kosovo.

Historic and cultural ties, and an almost total dependence on Russian gas have ensured that Serbia has continued to maintain good relations with Moscow, despite making EU accession its priority. Accordingly, Serbia refused to join western sanctions against Russia and has benefitted from its status as the only country outside the Commonwealth of Independent States (CIS) to have an FTA with Russia. However, Medvedev’s comment signals that as Serbia progresses towards EU membership it may have to sacrifice its privileged relationship with Russia.

Speaking at the CIS council in Dushanbe, Medvedev said the issue of Serbia’s FTA had been discussed with Vucic, and both sides had agreed that it would be impossible for the country to participate in two free trade zones simultaneously, Russian media service Sputnik reported.

Medvedev also claimed that the European Commission was putting pressure on Serbia to end its FTA with Russia. “We have an agreement on a free trade zone, concluded by the Russian and Yugoslavian governments. At present, as Serbia prepares to join the European Union, the European Commission wants it to abandon the agreement,” he told CIS heads of government in Dushanbe.

The comment was made the day after Vucic ended his visit to Moscow, although no comment was made on the risk to Serbia’s FTA with Russia from either premier during the visit.

The FTA was signed between Russia and the former Yugoslavia in 2000, and inherited by Serbia as the successor state. Under the agreement, goods produced in Serbia which have at least 51% value added in the country are considered to be of Serbian origin and can be exported to the Russian Federation duty free.

With the launch of the Russian-led Customs Union Serbia has, however, run into problems exporting some of its products to Russia, as permission from fellow Customs Union members including Belarus and Kazakhstan is now needed.

For several years, Belgrade has been trying to launch exports of Fiat 500L cars manufactured at the Kragujevac factory on the Russian market. The topic came up in talks between Vucic and Russian President Vladimir Putin, but there was no major breakthrough during the latest visit.

“I said that we have learned that this would be a problem for Kazakhstan, I guess because of the vehicles that they produce. President Putin said that he will hold talks on the issue and that he thinks that the problem will be solved,” Serbian state news agency Tanjug quotes Vucic as saying.

Meanwhile, according to the Serbian Customs Administration, Serbia’s exports to the EU market have been duty free since the signing of the Stabilization and Association Agreement in April 2008.

Medvedev’s comment can be seen as a warning to Serbia that it may have to choose between Russia and the EU.

Russia’s official pose is that it doesn’t have anything against Serbia’s EU accession, but it is strongly against NATO membership for Serbia, which currently declares itself to be militarily neutral. However, recent events in the Balkans such as the entry of several countries to the EU, Kosovan independence and Montenegro’s expected invitation to join Nato, have been pulling Serbia closer to the EU and NATO. These developments conflict with Russian regional and global interests, especially after the start of the Ukrainian crisis and the imposition of EU economic sanctions against Russia in 2014.

Aiming to keep its position and influence in the Balkans, as well as to limit the influence of the EU and the wider Western community, Russia has stood by Serbia in refusing to recognise Kosovan independence. Moscow has used its veto on the UN Security Council to block Kosovo’s membership of the UN, which is seen as the ultimate recognition of a country’s statehood.

Vucic’s visit was well timed in this respect, as it followed the adoption by the UNESCO executive committee of a resolution recommending the admission of Kosovo on October 21. Russia voted against this proposal, and statements issued by both governments during Vucic’s visit stressed Russian promises of continued support on this issue.

It also followed the release of the draft platform for Chapter 35 of Serbia’s accession negotiations, which concerns Kosovo. On October 12, Vucic slammed the draft platform, calling it “an awful paper” and said its content was effectively a request for the formal recognition of Kosovo. The increase in tensions between Serbia and the EU gave additional scope for Moscow to put pressure on Serbia.

Meanwhile, Russia’s so-called “soft influence” in Serbia has become more visible. For example, the Russian Institute for Strategic Research (RISI), better known as “Putin’s institute”, opened a branch in Belgrade in October 2013. At the beginning of this year, Russian Sputnik launched a Serbian language version of its multimedia news service.

Russia also wields influence over Serbia given its status as the country’s sole gas supplier. Serbia is currently repaying an outstanding €224mn gas debt to Russia, with the second installment of €100mn due at the end of this year.

Typically rumours of a gas price increase from Russia start to circulate every year in September and October, when the heating season is about to start. In a country where many people are relatively poor, this puts pressure on the Serbian government to negotiate with Russia to secure a favourable gas price.

The main concrete outcome of Vucic’s visit to Moscow was signing of an agreement on expansion of the underground gas storage facility in Banatski dvor in northern Serbia, joint venture between Serbia’s Srbijagas and Russian Gazprom. The agreement on expanding gas storage from the current 460mn cubic metres (cm) to 1bn cm will contribute to Serbia’s energy security.

Medvedev also indicated on the first day of the visit that Serbia would be included in new Russian plans for gas export infrastructure to Europe following the December 2014 decision to scrap the planned South Stream pipeline.

Serbian government statements mention the strengthening of economic cooperation, and Vucic was accompanied by a delegation of 100 businesspeople as well as eight ministers including Foreign Minister Ivica Dacic and Transport and Construction Minister Zorana Mihajlovic.

In the railways sector, a memorandum of strategic partnership was signed between Russia’s RZD International and Infrastructure of Serbia Railways. This follows an $800mn Russian loan for the modernization of Serbian railways approved in 2012. There was also a rather vague announcement about plans to send Russian-made helicopters in CEE countries to Serbia for maintenance, though Vucic later said in an interview with Serbian national broadcaster RTS that he wasn’t sure if Serbia had the capacity to do this. Overall, there was nothing to provide Serbia’s economy with an immediate stimulus to support its ongoing recovery.

While Russia has been presented as an important buyer of Serbian food, Serbia’s exports to Russia actually decreased by some 33% in 2015 due to the depreciation of the Russian ruble, which made the market less attractive for Serbian exporters.

In 2014, Russia was the second largest exporter to Serbia, after Germany, and the fourth largest destination for exported Serbian goods, after Italy, Germany and Bosnia and Herzegovina, according to data from the Serbian Investment and Export Promotion Agency.

By contrast, in the first nine months of 2015, European Union countries accounted for 64.0% of Serbia’s total external trade, down slightly from the 70.9% in 2014.