Briefing Paper III:

EXTERNAL INFLUENCE IN THE ECONOMIC SPHERE

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EXECUTIVE SUMMARY

The Briefing Paper III: External Influence in the Economic Sphere represents the third from a series of six briefing papers presenting the results of the ongoing research within the project.

The paper covers Russian, Chinese, Turkish, Gulf States’ and Iranian influence in the economic and financial sphere. It focuses on FDI and mutual trade, identification of main investors and forms of dependencies, especially in the energy sector and control of strategic assets. In addition, the briefing paper investigates economic activities undermining rules-based market competition such as corruption and non-transparent purchases.

Preceding briefing papers:

The Briefing Paper I: East vs. West provides the historical and geo-strategic context of the project – full version or an executive summary.
The Briefing Paper II focuses on Russian, Chinese, Turkish and Gulf States’ influence and activities in the political arena of the Western Balkan countries – full version or an executive summary.

Introduction

Economic influence by different foreign powers in the Western Balkans usually reflects their political influence, but not always. Russian and Turkish economic influence is limited but rising, much like their political influence. Iran and the Gulf States are present economically just as little as they are politically. A notable exception, however, is China, whose economic influence is rising and has significantly transcended its political influence over the last couple of years.

What needs to be underscored is the fact that the Western Balkan (WB) countries’ economic relations with the West - the US, the European Union and EU member countries – significantly surpass economic relations with any other countries, including Russia, Turkey, China, Iran and the Gulf States. The Western powers remain the single largest economic partners of the Western Balkans. Yet despite this data, some local politicians, officials and experts have in recent years portrayed the economic involvement of non-democratic actors to be if not greater than at least equally important to that of the West.

One of the main reasons for this public misconception is the fact that although economic in appearance, the Russian, Turkish, Chinese and some Islamic countries’ involvement is of a different nature than the involvement of the West. Specifically, when American or European investors or companies engage in business activities in the WB, they usually try to keep interactions as business-like and apolitical as possible. In contrast to this approach, business deals which involve Russian, Turkish, Chinese or Iranian companies are often of a political nature because they are almost always conducted in a way which promotes these countries' political and economic interests – by building close alliances with local leaders and using non-transparent, shady deals or corruption.

WB export and import shares with main pa

Russia

Russia’s share in the region’s foreign trade, investment, credit, and remittance flows has been on the decline for several years, falling from one of the region’s top economic partners at the beginning of the century to single digits today. Although the Western Balkan countries have been relegated to a third-rate level on Moscow’s foreign policy list, the region has not become irrelevant for Russia.

Russia remains among the key economic partners for Serbia and also focuses on developing closer ties with the Republika Srpska entity of Bosnia and Herzegovina (BiH). Its economic activities predominantly focus on the energy sector. Dependence on Russian oil and gas is the principal source of potential vulnerability for Serbia and Republika Srpska as well as Macedonia. Russia’s involvement is structurally very different in Montenegro where Russia is the biggest direct investor.

Notwithstanding Russia’s relatively small economic presence in the region when compared to the EU involvement, Russia has been consistently perceived and portrayed as an important investor and economic partner throughout the region.

Bosnia and Herzegovina
Over the years, Russia has developed closer economic cooperation with Bosnia. However, in line with its political interests, it has almost solely focused on the Serb-dominated entity, Republika Srpska. Moreover, Russia’s economic interests in Bosnia are closely tied to the energy sector, and Bosnia remains dependent on Russia’s energy (gas) supplies. Russia has predominantly invested in the oil and gas industry, while it has also attempted to purchase and/or invest in other sectors of the energy industry, though often without success. In addition, as a consequence of the EU’s embargo on some Russian goods, Bosnia was able to export more of its fruits and vegetables to the Russian market. Read more...

Kosovo
Russian influence over Kosovo’s economy remains small and mutual economic cooperation limited. Its activities are centered mostly on the Serb dominated Northern region of the country. Furthermore, Kosovo’s decision in 2014 to join the EU countries in imposing sanctions against Russia because of the annexation of Crimea further impaired mutual relations. Read more...

Macedonia
Russia has a limited economic influence in the country but like in the political sphere, Russia strives for greater economic power and dominance in Macedonia. Most importantly, Russia has been successful in exploiting Macedonian energy dependency on fossil fuels (gas, coal and oil) and dominating the country’s energy sector by having control over the only gas route through the TransBalkan Pipeline. Read more...

Montenegro
Russia belongs to the most significant investors in Montenegro. Despite Montenegro’s pro-Western orientation, and its acceptance into NATO, economic ties between the two countries remain significant. It is interesting to note that Russian economic influence in Montenegro does not rely on Russian energy resources, as it does in the other analysed Western Balkan countries. Instead it mainly focuses on two main sectors: real-estate and tourism. Read more...

Serbia
Russia is an important economic partner for Serbia, who is also largely dependent on Russian oil and gas supplies. In recent years, Russia’s economic footprint in Serbia has stagnated in the wake of an economic recession, low oil prices, the international sanctions over the annexation of Crimea, and Russia’s shifting priorities towards the Middle East and the Pacific. Russia, however, continues to be Serbia’s second-largest non-EU trading partner (third in imports from Russia by value, and third in exports). Read more...

Read more details about Russia's economic relations with the individual Western Balkan countries in the full BRIEFING PAPER – it is easy to navigate to the section of your interest.

China

China’s real economic impact in the five non-EU countries in Western Balkans remains low, except perhaps for Serbia, which enjoys a more robust economic relationship with the PRC. The perception, however, is widespread throughout the region of a significant Chinese economic presence, especially in terms of investment. At the same time, Chinese FDI outside of Serbia remains negligible.

The discrepancy between quantifiable reality and public perception is not unique to Western Balkans; in fact, it is typical for Central and Eastern Europe as a whole. There seem to be several reasons for this curious gap between facts and impressions.

Perhaps the most important one is the general confusion about the relationship between political and economic factors in the relationship with PRC. “Chinese Investments” have been hyped by the two major Chinese public diplomacy offensives, the “16+1” forum and Belt and Road Initiative (BRI). The rhetoric of these campaigns has been amplified by vocal parts of the local political establishments, influenced by Chinese propaganda and United Front tactics, including outright corruption, as documented in Macedonia. A politically motivated, persistent narrative of massive Chinese investments, driven by both Chinese and local actors, is rather easily mistaken for economic fact.

Second, the overall lack of transparency in the economic relationship with China leads to common misperceptions. The capital inflows from China that do materialise are mostly not strictly speaking FDI, but rather loans from China’s policy banks like theEximBank with conditions like the mandatory use of Chinese contractors and labour. Similarly, the celebrated rise in trade hides the fact that the exchanges are highly skewed in China’s favour, with imports typically dwarfing exports by a factor of 10 - and in Serbia’s case, a mindboggling factor of 63.

Finally, political factors sometimes reinforce each other to devastating economic effect. For instance, in Macedonia, tapes have been released with phone conversations between the PM and Transportation Minister on one side and the Chinese company Sinohydro on the other, discussing bribes in the tens of millions of euro. Sinohydro builds highways in Macedonia and elsewhere in Western Balkans, typically financed with China’sEximBankloans offered under unfavourable terms that would likely not be agreed to by less pliable local politicians.

The financed projects and their often non-transparent nature led some foreign observers to express warnings against a possible “debt-trap”.

Bosnia and Herzegovina
China is still a relatively new "player" in BiH as it remains focused on Serbia and Croatia which are much bigger markets for its projects. This, and the fact that most Chinese business deals do not actually fall into the category of foreign direct investment, have contributed to the fact that China does not even make it on the list of foreign investors in BiH. Also in terms of trade relations, BiH has very limited exports to China. Read more...

Kosovo
Despite the fact that over the past several years China has been increasingly courting Balkan countries with investments, economic activities between Kosovo and China continue to be insignificant thus far. Kosovo is even excluded from Chinese initiatives. Read more...

Macedonia
China’s economic influence in Macedonia has been growing steadily, but not rapidly. This year, China has become Macedonia’s seventh largest trading partner, despite not having been among the ten biggest trading partners ever before. Prospects of continued Chinese economic influence in Macedonia are mixed. China’s plans for involvement are hampered by corruption scandals and its infrastructural projects carry a significant risk of economic unsustainability for the indebted Macedonian economy. Read more...

Montenegro
Economic cooperation between Montenegro and China is relatively new and focuses primarily on the development of infrastructural projects along the lines of several initiatives, most importantly the ‘16+1’ summit and the One Belt and One Road Initiative (OBOR). The largest Chinese projects in Montenegro are: a) the railway track connecting the city of Bar with Belgrade, b) a highway between Montenegro and Albania and c) the construction of the Podgorica-Kolašin motorway section. Read more...

Serbia
Serbia stands out among the five countries as having a more significant economic relationship with China, reflecting the unusually close political relationship, cultivated by China in both the governing party and the opposition. Chinese “investments” mostly take the form of M&As, largely through acquisitions of underperforming former state-owned companies. Chinese policy banks have also been financing with loans various infrastructural projects, notably the Serbian section of the Belgrade-Budapest high-speed rail.

Serbia has also gone the furthest in accepting Chinese participation in its telecom and IT infrastructure, especially after the election of the Prime Minister Ana Brnabic government in 2016 which made digitalization its top priority and enthusiastically joined the “Digital Silk Road”. In contrast to many western countries, Serbia apparentlyharbors no security concerns in this area; Chinese companies like Huawei develop key IT projects for various ministries, including potentially sensitive projects like national broadband network or “safe cities”. Read more...

Read more about China’s rising involvement, its infrastructural projects and their potential backlashes in the Western Balkans in the full BRIEFING PAPER.

Turkey

Investments, trade and business deals have been a key part of Turkish "soft power" approach to the Western Balkans over the past decade. Turkey has strengthened its economic presence in the Western Balkan countries over the past several years, with Turkish companies being active in construction, retail, banking and production; and Turkish development agency TIKA financing multiple projects, usually in support of the Ottoman heritage renovation. However, Turkish economic influence still lags behind traditional economic partners from the European Union, such as Germany and Italy.

Bosnia and Herzegovina
Even though Turkey has established itself as one of the key business partners for BiH and Bosnian officials have glorified their business relations as the "best practice" in the region, the statistics in recent years have shown that levels of Turkish investments and trade exchange with Serbia and Croatia are significantly surpassing Turkish business relations with BiH. Pledges of multi-billion dollar investments in Bosnia were recently made by Turkish President Erdogan, but the future of these investments is unclear due to political and economic instability in both countries. Read more...

Kosovo
Turkey has a strong economic presence in Kosovo. It is estimated that Turkey’s investments in the country amount to 372 million euro in total since 2008, when the Kosovar-Turkish Chamber of Commerce became operational in Kosovo. These figures rank Turkey among the countries with the highest economic activity in Kosovo, other countries being Germany, Switzerland, Austria, and the United Kingdom. Read more...

Macedonia
Turkey was the 8th most significant trade partner for Macedonia for the first half of 2017 and 2016. The total amount of Turkish investment in Macedonia is 1.2 billion euro which amounts to 35% of all direct investments. This makes Turkey one of the most important players in the country. Read more...

Montenegro
Turkish companies are modestly involved in the Montenegrin economy, but lag behind Russia, the UAE, Norway, Italy, and Switzerland, as well as some Western Balkan countries, such as Serbia and Slovenia. Montenegro does not represent of key strategic interest for Turkey. Read more...

Serbia
Serbia is Turkey's most important market in the Western Balkans. Economic relations between the two countries began to develop significantly more than nine years ago, when a free-trade agreement was concluded with the Turkish government. Since then Serbian President Vucic and Turkish President Erdogan have reiterated on several occasions the importance of their two countries’ mutual economic cooperation. Read more...

Read more about Turkish involvement in the Western Balkans economic and financial sphere in the full BRIEFING PAPER.

The Gulf States and Iran

Gulf States have been economically active in the Western Balkan countries in the recent years but there is no evidence of any clear strategy on the side of the Gulf countries in this regard and pledges of investment fairly surpass the amount of actual investments. In addition to the funding of the construction and renovation of religious buldings in the Balkan countries with muslim population such as BiH, Kosovo and Macedonia, especially UAE companies were active in Serbia and Montenegro and companies from Saudi Arabia in BiH.

Iran has been exercising verylimited, if any, economic influence in the Western Balkan countries in recent years. There have been small developments, including lifting visa regimes and several high-level meetings, but tangible economic results are yet to be seen.

Bosnia and Herzegovina
For many years now, investments from, and trade with, the Gulf countries, Iran, and other Islamic countries in BiH have been marginal and mostly limited to occasional business deals negotiated between individual Islamic officials and Bosniak leaders. The situation began to change over the last three or four years when BiH saw a sharp increase in the number of tourists from Gulf countries. Many of them in the past used to spend their summer holidays in tourist resorts in Northern Africa or Middle East, but following the destabilization of this entire region, they found an alternative refuge in BiH, which has also affected Arab investments in the country. Read more...

Kosovo
Considerable amounts of financial means have entered Kosovo from the Gulf countries since the end of the war in 1999. In general, the money was mainly used for the promotion of political Islam, however, there were also some financial means sent in the form of donations, or to support different projects. Read more...

Macedonia
It is difficult to find evidence of any substantial economic relations between the Gulf States and Macedonia, apart from the construction of a number of mosques in the Albanian-majority areas throughout the country with Saudi funds.

Historically, Iran has exercised verylimited if any economic influence in Macedonia. The current Macedonian government made an attempt to change that by hosting representatives of the Iranian Trade Association in April 2018, which has not resulted in any substantial developments so far. Read more...

Montenegro
The Gulf States have been active investors in Montenegro in recent years with the UAE as the leading investor. Investments were mainly aimed at the banking sector, construction, the tobacco industry, and tourism.

Iran has not yet been a significant player or investor in Montenegro. However, the two countries have recently lifted the visa regime, which promises more potential investors and people exchanges on both sides. Recently, flights on the route Podgorica-Teheran have been introduced. Read more...

Serbia
Relations between the Gulf States and Serbia have intensified after 2012, when new political leadership opened the doors to potential investors from the Middle East in order to address Serbia’s severe economic situation. Even though the investments pledged largely surpass the reality, and actual investments are often controversial and have far-reaching consequences, Serbian political leaders are tireless in promoting these developments in the media.

Even though economic interests are the main drivers of Serbia’s good relations with Iran, the current level of economic cooperation has not brought tangible economic benefits to Serbia yet. Read more...

Read a more detailed account of Islamic countries’ involvement in the economic sphere in the full BRIEFING PAPER.