Ian Bancroft in Belgrade -

Two years on from Kosovo's declaration of independence, whilst relations with Albania go from strength to strength, those with its northern neighbour Serbia remain plagued by recognition-related disputes. A pity, for with a trade deficit of some €1.7bn in 2009 and an estimated unemployment rate of 43%, Kosovo's need for export markets grows ever more acute.

Serbia, however, which opposes Kosovo's independence, continues to boycott products bearing customs stamps marked with the "Republic of Kosovo" as opposed to "UNMIK" (the UN's Interim Administration Mission in Kosovo), the only body that Serbia regards as legally-authorized to represent Kosovo internationally. The dispute has prevented Kosovo's participation in meetings of Cefta (the Central European Free Trade Agreement) and inhibited the resolution of, in particular, non-tariff barriers to trade throughout the region.

The incompatibility of customs procedures - combined with the fact that vehicles bearing Kosovo license plates cannot enter Serbia proper - has further stifled trade, with smuggling widely alleged to have filled the void. Southern Serbia, with its predominantly ethnic-Albanian population, has been especially badly hit, adding to fears of further secessionist claims.

Despite these obstacles, there is some room for optimism. As Diane Cromer, managing partner of Cromer Group Workforce Development in Belgrade, tells bne: "It is hard to disaggregate the specific influence of Kosovo's declaration of independence on trade from the need of politicians to posture, and the legacy of bribery and corruption in cross-border movement. In practice, Serbian companies attend trade fairs in Pristina, with successful results and new lines of communication on customs issues. Kosovo companies, meanwhile, perform well at Serbia's trade fair in Bujanovac [in southern Serbia]. It is in these real-life examples of businesses and consumers on either side of the border attempting to reconstruct a normal life and survive a global economic crisis that tells the story."

Ethnic ties

After decades of Albanian isolation and Kosovo's incorporation into the Yugoslav market, relations between Kosovars and their ethnic brethren have, in comparison, blossomed since Kosovo's declaration of independence in 2008.

Last summer's assertion by Albania's Prime Minister Sali Berisha that the two states shouldn't view each other as foreign countries and all customs administration should be abolished, provoked a sharp retort from Belgrade. In signing a memorandum on strengthening economic and education with Kosovon PM Hashim Thaci, however, Berisha laid the strong foundations for various infrastructure, energy and trade-related initiatives.

For Dr. Albert Rakipi, executive director of the Albanian Institute for International Studies (AIIS) in Tirana, "strengthening economic relations between Kosovo and Albania is essential for both countries' economic viabilities. The Durres-Kukes highway - also known as 'the highway of the nation' - has brought remarkable changes to the infrastructure linking the two countries, and will ease Kosovo's access to the port of Durres."

The potential is clear. Kosovo today accounts for only around 2% of Albania's total exports. Dr. Rakipi cautions, however, that "although the emergence of an ethnic market between Albania and Kosovo may appear to be a piece of cake... economics remains one of the weakest links," due to the "low degree of industrialization" and the fact that "the markets and economies of Balkan countries are generally steered towards EU member states, particularly Italy and Greece." For Dr. Rakipi, the main challenge to this dynamic is "a 'back to the future' trend in Balkan economics... a return to the trading routes of the former Yugoslavia."

With both countries suffering from daily power outages, energy cooperation is a key strategic priority. A memorandum to construct a lignite-fired power station in Kosovo has already been signed between the Albanian Power Corporation (KESH) and the Kosovo Electricity Corporation (KEK). In contrast, KEK's decision to cut supplies to Serbs in the north of Kosovo due to the non-payment of bills has effectively partitioned the energy sector, with Serbia's state utility, Electric Power Industry of Serbia (EPS), moving in to restore power to area.

The pressing economic concerns of Serbia and, in particular, Kosovo dictate the need to find practical solutions that can facilitate the re-establishment of severed trade ties. For Serbia - whose own unemployment rate continues to rise, whilst the value of its currency falls - Kosovo remains an important market due to the positive trade balances that it has traditionally maintained. Whilst Serbia opposes even minimal economic rapprochement, however, Albania continues to further strengthen its hand in key economic, trade and energy spheres.

For Kosovo, the challenges of running its regional trade policies, more generally, will have a determining impact on its own economic viability and prospects for EU membership. Whether economic imperatives can trump political wranglings, however, remains to be seen.