Serbia secures $500m loan from Russia

By bne IntelliNews July 11, 2013

bne -

Belgrade is set to finally clinch a $500m budget support loan from Russia, Serbian Prime Minister Ivica Dacic said on July 11 following a meeting with his Russian counterpart Dmitry Medvedev. The news is likely to extend Belgrade's hopes of muddling through without agreeing an IMF loan.

The first $300m tranche of the loan is to be handed to Serbia immediately. Russia will make the remainder available once it receives official notification that Belgrade has agreed on a new economic programme with the International Monetary Fund (IMF). "An agreement will be signed on the provision of a half a billion dollar loan by Russia for the Serbian budget," Dacic said during a visit to Moscow, according to RIA Novosti.

The Serb government has been discussing a potential loan from Russia to help finance its budget deficit since at least September - although it has been hoping to secure variety of funding favours from Moscow for far longer. The initial request for a $1bn loan to help tide over its fiscal accounts was reduced to $500m earlier this year, according to Serb Finance and Economy Minister Mladjan Dinkic.

However, the second tranche of the loan looks some way off. Belgrade's talks with the IMF over its fiscal strategy and a potential loan look to have ground to a halt in recent weeks. The Socialist Party-led government has said its demands for public salaries and pensions to be cut are "difficult," and insists its revamped 2013 budget is built for Serbs, not the international institution.

Encouraged by recent successful bond issues - even at yields around 10% - the government still hopes to survive without having to give in. Dinkic reiterated on July 10 that an agreement with the IMF is "unrealistic at the moment". The Russian loan will likely only extend that, although it will also be keeping a close eye on the slowdown on emerging market debt markets.

The 10-year loan from Russia, at a fixed annual interest rate of 3.5%, will help - but only to a limited extent. Serbia's 2013 budget deficit target is set at 3.6% of GDP. That would leave the country struggling to find €4.8bn to finance the gap as well as keep up with its debt obligations - state debt having reached 65% of GDP - well above the 45% limit the government previously set. On top of that, the country's Fiscal Council insists the deficit if more likely to come out closer to 6%.

Russia remains the top investor in the Serbian economy, and in addition to the new budget support loan recently lent Belgrade $800m to modernise its rail infrastructure. However, the talks between the two PMs were less productive in the political sphere. While Medvedev told Dacic Belgrade can always count on Russian support, he insisted that Serbia must push for a deal with Kosovo, rather than expecting Russia to broker an agreement.

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