Western Balkan economies move closer together, despite difficult history

By bne IntelliNews July 1, 2014

Andrew MacDowall in Sarajevo and Belgrade -


Journalists and curious tourists descended on the Bosnian capital of Sarajevo the weekend of June 28-29 for the centenary of the assassination of Archduke Franz Ferdinand, with many a report mentioning the Balkans are still divided by ethnic politics and the consequences of conflict, a century after a shot fired by a nationalist sparked the World War I. The region certainly has real problems with unresolved territorial disputes and legal cases over the legacy of war; sometimes these impact economics as well. But generally, the Yugosphere is coming closer together economically as businesspeople ignore the political rifts.

“Despite persistent glitches and occasional implicit disagreements in political relations among neighbours from the former Yugoslav republic, both political and economic relations continue to improve steadily,” Luka Oreskovic, principal at Eastbridge Strategies, a CEE-focused strategic consultancy, tells bne. “Yet while it continues to be difficult to institutionalise political ties, economic ties continue to exponentially grow with each year.”

The anniversary of the assassination was marked in Sarajevo by events emphasising reconciliation and peace after a century of war. Conferences and exhibitions discussed the legacy of war and how to heal the wounds of conflict. A somewhat eccentric play by Bosnian director Haris Pasovic was performed on the Latin Bridge, beside which Franz Ferdinand and his pregnant wife Sophie were shot by Gavrilo Princip, a radical who desired either freedom for the Southern Slavs from Austrian rule or a Greater Serbia, depending on one’s interpretation. Various bigwigs attended a concert of the Vienna Philharmonic in the refurbished city hall, a garish pseudo-Moorish structure ruined by Serb shelling during the 1992-1995 Bosnian War.

But in a sign of how petty and tetchy relations between the various actors in the region can still be, the events were boycotted by the president and prime minister of Serbia over the wording of a plaque commemorating the shelling on the building. Though they probably would have avoided the ceremonies anyway, the reason given for the boycott is a sign of how difficult relations between countries in the region can be.

Together, apart

Bosnia-Herzegovina itself is divided into two ethnically-defined entities, the largely Croat and Muslim Bosnian Federation, and the Bosnian Serb Republic (RS), which regularly agitates for independence and blocks any attempts to unify the state. Investors complain that the multiple layers of government make decision-making slow, though the RS has a more centralised system than the Federation. International bodies including the International Monetary Fund (IMF), which has helped support the beleaguered economy with loans, have to shuttle between Sarajevo and Banja Luka, the capital of the RS.

To the south, Kosovo’s independence is not recognised by the UN or Serbia, which sees the country as a breakaway province, and Serbs in the north also reject Kosovan sovereignty. While generally investors feel that corruption and low administrative capacity are more of a problem than Kosovo’s disputed status, both Belgrade and Pristina have claims on the large Trepca mines in the north of the country, and the legal limbo has held back investment.

Even where territory is not officially disputed, divisions still exist. In Macedonia, clashes between ethnic Slavs and Albanians occasionally lead to violence and even deaths. Serbia and Croatia are pursuing mutual cases of genocide against one another at the International Court of Justice.

But regional trade ties are growing nonetheless. One of the catalysts for trade development is the Central European Free Trade Agreement (CEFTA), which encompasses all the former Yugoslav states not in the EU plus Albania and Moldova. Since the agreement came into force in 2007, intra-regional trade has risen. Members’ exports to other member states rose from 15% of total exports to 20.5% in 2012, peaking at 25% in 2008, just before the economic crisis hit demand for imported goods in the region, according to William Bartlett, senior research fellow in the political economy of South East Europe at the London School of Economics. However, there is still some way to go: regional trade is dominated by commodities and trade between companies in different sectors remains low.

Economic ties are admittedly strongest between countries and regions with ethnic ties – for example Albania and Kosovo, Serbia and the RS, and Croatia and the Croat-dominated areas of western Bosnia. But this is partly a matter of geography. “There is little prospect of increase in economic ties between Serbia and Kosovo, although these do exist, for example Serbian processed agricultural goods are exported to Kosovo,” Bartlett tells bne, citing the example of the Serbian “Chipsy” brand of crisps popular in Kosovo.

CEFTA has become a significant enough factor for Croatia’s exit after it joined the EU in July 2013 to have a noticeable impact on the region’s economies. “It was definitely visible in Croatia's economic output that it left CEFTA, as the economy experienced difficulties last year, despite the EU accession,” Zoltan Arokszallasi, a senior analyst at Erste Bank, says. “The positive impact of EU accession to Croatia can, however, eventually be perceivable on growth numbers too. After Croatia left CEFTA, Serbia naturally has a more dominant position in the Agreement. Serbia was, however, already running a surplus with other CEFTA countries earlier. The exit of Croatia changes the relative position of several industries in both countries.”

Improving standards

In Sarajevo, assassination anniversary aside, one of the most common talking points among diplomats, think-tankers and businesspeople is the country’s failure to bring its agricultural regulation up to EU standards – thus cutting its farmers off from the Croatian market. One diplomatic source told bne that the main reason is the fact that there is no state-level agriculture ministry due to the RS’ instance that agriculture is an entity-level issue.

Beyond CEFTA, the EU accession process should help support regional trade by lowering barriers and improving regulation, as well as providing funds for infrastructure and agriculture development. Bartlett also sees promise in the ambitious SEE 2020 Strategy launched by the Regional Cooperation Council, a grouping of the region’s governments, which foresees boosting intra-regional trade from €94bn to €210bn. But non-EU members in the region are at least half a decade from EU membership, and in many cases considerably more. And implementing lofty goals on the ground, even with legislation in place, has repeatedly proved problematic in SEE.

Of course, regional economic ties are about more than just goods crossing borders – investment and the expansion of regional companies are also factors.

Oreskovic cites the example of Croatian food and retail company Agrokor’s acquisition of Slovenian retailer Mercator, a €1.3bn deal confirmed on June 26. The combined company will be a true regional giant, with revenue of around €7bn a year. Agrokor hopes to follow the acquisition with an initial public offering in London, followed by a move to expand in countries outside the region, possibly the large and highly-competitive Russian and Turkish markets.

“Last week's closing of the acquisition is the best example of how a now Croatian-Slovenian retail chain will consolidate and come to dominate the retail market across former Yugoslav republics by joining forces across state lines,” says Oreskovic. “Such consolidation plays will likely continue in other sectors as well as businesses look to grow, opting to acquire new assets in markets they know well - which are their neighbouring countries of former Yugoslavia. Although political barriers to such expansion exist, the combination of political inconsistency and private sector's unwavering efforts to expand will result in more interconnected markets and businesses in former Yugoslavia with every year that passes.”

Economic clouds

More than politics, the biggest risk to greater regional trade and investment, and the expansion of companies across the Western Balkans, is the patchy economic outlook. Arokszallasi expects Serbia to slip back into recession this year after devastating flooding in May, and Croatia’s economy will probably also shrink. The smaller economies will do better. Montenegro and Albania will rack up more respectable rates of 2.9% and 2.1%, respectively, according to the IMF, while Macedonia, which according to the World Bank has the region’s best business climate, will reach 3.2%, rising to 3.4%. Kosovo is the leader, with a forecast of 3.9% - the IMF being more conservative than some who predict a 5% GDP expansion. But this is from a low base.

The logic of trading with nearby countries with long historical and often linguistic ties is strong, as is the establishment of regional firms in competitive markets increasingly penetrated by foreign companies. The further thawing of diplomatic relations evident from Serbia’s 2013 agreement with Kosovo and reciprocal visits of heads of government and state should ease some of the political challenges to closer regional economic cooperation.

As many Bosnians will tell you, even in their deeply-divided country, “money has no ethnicity”.

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