US Takes Lead in Investing in Serbia

Once seen as Serbia's biggest foreign foe, the United States is now spearheading its economic revival

Author: Senita Slipac
Source: Balkan Insight

Some 14 years after pressing for the United Nations to impose sanctions on Belgrade, the United States has become Serbia and Montenegro's biggest foreign investor.

The World Bank says American firms accounted for roughly one-third of the 3.5 billion US dollars of foreign money invested between 2002, when the sanctions were eventually lifted, and the end of 2004.

Although one or two million people of Serb descent live in the US, émigré ties to the "homeland" have played little role in driving this investment.

The US-based Serbian Unity Congress and Serbian American Chamber of Commerce periodically organise conferences and inform investors of opportunities in Serbia. But few Serbian-Americans have actually invested there.

Instead, flagship mainstream companies, including Phillip Morris, US Steel, Galaxy Tire, the air traffic control firm AAR and the Ball Corporation have shown the way.

Although the embargo on Belgrade was lifted soon after the fall of the regime of Slobodan Milosevic in 2000, major foreign investment in Serbia only took off in 2003. That year, Phillip Morris purchased a tobacco factory in Nis for 605 million euro, while US Steel bought Serbia's only steel factory for 205 million euro.

Those two purchases alone made up well over 50 per cent of a total of 1.3 billion euro in direct foreign investment in Serbia that year, according to the Economist Intelligence Unit.

It also made the US the leading investor in Serbia and Montenegro, up from fifth place the year before.

Foreign investment slumped in 2004, as privatisation slowed. Hypo Alpe-Adria Bank, which handles a lot of investment in the region, noted that only 250 firms were privatised in Serbia in 2004, down from 800 in 2003.

The stagnation was linked to political uncertainty. Without a president from 2002 onwards, owing to low voter turnout in presidential elections, Serbia seemed adrift.

It was only in June 2004 that Boris Tadic, of the moderate Democratic Party, DS, was elected president, defeating the ultranationalist Serbian Radical Party's Tomislav Nikolic.

The new president had campaigned on pledges to boost the economy by improving ties with the US and the European Union, and in 2005 foreign investment bounced back to around two billion dollars. It is expected to continue growing in 2006.

Late last year, Thomas Kelly, who manages US Steel's operations in Serbia , told the Serbian Investment and Export Promotion Agency, SIEPA, that things were going well for his own company there.

This success, he said, would also help to strengthen US Steel's own Economic Development Centre in Belgrade, a project which was set to spend 1.5 million dollars over a three year period promoting direct foreign investment in the country as a means of stimulating economic growth.

Many experts are surprised that a notoriously corrupt country such as Serbia , which was a political pariah just a few years ago and which endured 78 days of NATO bombing that devastated its infrastructure in 1999, now attracts major US investors.

By way of an answer, John Sailor, the director of the Washington-based US-Serbia and Montenegro Business Council, notes that Serbia is "the hub of the Balkans with a well-educated workforce and good taxes."

Serbia's geographic location is certainly a factor. Two major European highways pass through the country.

The nature of the country's workforce is perhaps more important, however. About 40 per cent of the workforce in Serbia speaks some English, roughly double the percentage in Bulgaria or Hungary.

The labour force is familiar with new technologies and wage levels are well below the European average.

According to SIEPA, labour costs are low even in relation to other former Yugoslav republics – about 50 per cent less than neighbouring Croatia, for example.

Meanwhile, the local market is relatively large, with a population in Serbia of about eight million, and Belgrade is the only country outside the Commonwealth of Independent States which enjoys free trade agreements with the Russian Federation.

That means Serbia has the potential to act as a channel for customs-free access to a market of 150 million people, according to SIEPA.

On the downside, Serbia and Montenegro is still suffering the after-effects of the wars of the Nineties.

Several war crimes suspects wanted by the UN's International Criminal Tribunal for the Former Yugoslavia, ICTY, in The Hague, including the former head of the Bosnian Serb army, Ratko Mladic, are thought to use Serbia as a refuge.

The EU has made it clear that Mladic's surrender to the Hague court is a non-negotiable condition for further progress towards integration.

"Mladic is a dark cloud hanging over the Serbian people," said Sailor, adding that his arrest would powerfully stimulate more US investment.

Some investors are also worried over the potential for violence in or around Kosovo as talks continue over it's future political status.

Sailor, however, maintains that Kosovo's "de facto" separation from Serbia since 1999 has reduced the risk factor.

"If that region was fully controlled by Belgrade, it would be an issue," he said. "But since it is not, it doesn't affect US business at all."

Another problematic issue in Serbia is privatisation. Although the country has pioneered one of the region's fastest privatisation processes, the path has not always been smooth.

A major bone of contention between the Serbian parties in government remains the future of the oil refineries.

Russia's Lukoil and British Petroleum have both expressed interest in acquiring Serbia's NIS Oil. But while the energy minister, Radomir Naumov, and the reformist Group 17 party are eager to sell the company, the prime minister, Vojislav Kustunica has refused to privatise it, saying the oil industry is too valuable an asset.

The impasse could prove costly, as the International Monetary Fund, IMF, has made its economic assistance conditional on the privatisation of oil. Without an IMF deal, foreign investment may drop.

Belgrade is working to compensate for these problems by creating an investor-friendly environment and putting in place a highly attractive tax regime.

With business profit taxes set at 14 per cent, Serbia now boasts the lowest corporate tax in Europe. In Romania the rate is 25 per cent, and in Bulgaria nearly 20 per cent.

Moreover, Serbia exempts businesses that invest more than 7.5 million euro from all business taxes for ten years. Firms can even apply for government subsidies for creating jobs.

Belgrade has also simplified the registration process for foreign investors, setting up the Serbian Business Registration Agency in 2005 to cut red tape and slash waiting times from up to two months to about ten days.

"The Serbian government has been very easy to work with [and] if there is an issue, it is easy to address it with the government officials," Sailor said.

For its part, the US government has encouraged firms to invest in Serbia. The Export Import Bank, an official US export credit agency, provides insurance, loan guarantees and other assistance.

Sailor says Belgrade must now start to fully realise the importance of consolidating its new ties to the US.

"The Serbian government needs to have a full time lobbyist to pursue its interests in the US [and] improve the image of Serbs," he said, "because investors still have a negative picture of Serbia ".

Senita Slipac is Balkan Insight contributor. Balkan Insight is BIRN's online publication.