Knocking on EU's door, Serbia tries to tap investment potential

BELGRADE Mon Apr 22, 2013 8:52am EDT

BELGRADE (Reuters) - Serbs pride themselves on their hospitality, and Abu Dhabi's crown prince got the full treatment this year: skiing in the mountains, a tour of Belgrade's Red Star soccer club and a parting gift of hand-knitted woollen socks.

For years an exporter of war and instability, Serbia is now trying to lure hundreds of millions of dollars in Arab investment to its ailing economy.

But Sheikh Mohammed bin Zayed al Nahyan had one question above all others, said Sinisa Mali, Serbia's chief negotiator with investors from the emirate: "Are we going to get the date for European Union accession talks?".

The European Commission recommended on Monday that the talks should begin after Serbia struck a deal with Kosovo, its province which broke away more than a decade ago. The EU's executive arm fell short of answering the crown prince's question, naming no date, but if all goes to plan the talks should begin later this year.

"Whoever wants to come has one question in mind, and that's political risk," Mali told Reuters. "And the main source of the political risk was this thing with Kosovo."

Serbia's refusal to come to terms with the loss of its southern province in a 1998-99 war has aggravated instability in Belgrade, slowed reform and helped to keep investors away from arguably the most promising market in the western Balkans.

Serbia took a giant step towards putting the issue to bed last week with the historic accord to cede its last foothold in Kosovo and settle relations with the Albanian majority.

As a reward the European Commission made its recommendation, albeit with some conditions attached, and a formal date for the talks is expected to be announced in June.

Negotiations are likely to last much of this decade, but the process alone will unlock EU funds and should help to anchor Serbia in a reform drive that the government hopes will unleash its investment potential.

"When accession negotiations start, essentially you have the whole Commission machine cranking into gear, providing support, advice, funding," said a Western diplomat, who declined to be named. "It's about reaching the point of no return, where the positive reform process becomes inevitable, and not subject to the whims of a minister or party in government."

Serbia scents an opportunity to exploit its size, location and links to East and West. The ambition is to re-establish Belgrade as a regional power for the first time since Yugoslav leader Josip Broz Tito strutted the world stage in the 1960s and 70s as co-founder of the non-aligned movement.

When Belgrade was the capital of Yugoslavia, its writ ran from the Alpine slopes of Slovenia in the north to impoverished Macedonia in the south, taking in 22 million people and seven now-independent states, most of which shared a common language.

Yugoslavia was ripped apart by war in the 1990s and Serbia became a pariah, ravaged by hyperinflation and sanctions and plundered by the cronies of late strongman Slobodan Milosevic. Its recovery has been painstakingly slow.

RED TAPE, GRAFT

With a shrinking population and a jobless rate of around 25 percent, the problems are great. Serbia is unlikely to join the EU before 2020, but the potential is there.

Belgrade "is the most important city in the region, whether you're talking about the economy, or cultural, political importance," said Andrew Roberts, head of the Belgrade-based Eastern Europe Economics research consultancy.

Yugoslavia's successor states are likely to develop neglected economic ties with each other, said Roberts.

"Most of these countries at the moment tend to trade directly with the EU ... rather than among themselves, but for anyone looking at the future of the region you'd have to see a lot more trade between the countries as well," he said. "There's a lot of potential to be realised there, and Belgrade's clearly an important part of that."

Roberts said agriculture, manufacturing and a small but growing IT industry offered the most promise. With an average wage of 380 euros ($500) per month, labour costs are low, but the workforce is skilled.

With 7.3 million people, Serbia is the largest of the ex-Yugoslav republics and already averages around $3 billion per year in foreign direct investment, outstripping neighbouring Croatia, which joins the EU on July 1.

Italian auto giant Fiat led the way in 2008 with a car plant investment that has grown to 1 billion euros. The same year Russia's Gazprom took a cut-price majority stake in Serbia's NIS oil and gas company for 400 million euros.

These are the highlights. Otherwise, Serbia's economy and its business climate have been suffocated by red tape, political interference and widespread graft. Output shrank 1.7 percent in 2012, but should return to growth this year.

The World Bank, for example, rates the country among the world's 10 worst in terms of how easy it is to obtain a construction permit. This can take nine months in Serbia, requiring 18 different official stamps and untold bribes or political connections.

"There's a lot of corruption, a lot of inefficiency, inexplicable bureaucracy," said Roberts. "If you're moving towards the EU, investors would have more confidence that their investments would not only make money but be safe in a situation where there might be legal disputes."

The Western diplomat cited an Austrian distributor for a fast-food chain looking to set up in the ex-Yugoslavia.

"He was very interested in Serbia, but had decided not to go near it because the political murkiness of getting the licences and doing the work," the diplomat said. "So he went to (EU member) Slovenia instead, as a toe-hold in the Balkans."

"If Serbia cleans up its act, the country makes perfect sense," he said.

TIES WITH RUSSIA

For a decade after Milosevic's overthrow in 2000, Serbia oscillated between nationalists who favoured closer ties with Russia and pro-Western leaders who said the country had little choice but to tie its fortunes to the EU.

The nationalists softened, swung behind a pro-EU course and took power last year.

But they kept up good ties with Orthodox ally Russia, with which Serbia has a free trade agreement, and Belgrade can still tap relations with the 120 members of the non-aligned movement.

Serbia sits at the center of the Balkan Peninsula, on well-trodden routes east-west between Asia and Europe and north-south from Vienna to Athens.

"We can export to the EU and Russia without customs, which puts us in a very unique position," said Mali, the Serbian negotiator and an adviser to Deputy Prime Minister Aleksandar Vucic. "If you establish your operations in Serbia you can freely export to both."

He said the country had struggled to attract small and medium-sized investors to the agriculture and IT sectors precisely due to the uncertainty surrounding Serbia's EU membership prospects. "It's all long-term, and for long-term investment you need to have political stability," he said.

You need infrastructure too. Serbia is upgrading its highways, but the rail network is in dire straits. With an average speed of 35 km/h (22 mph), trains in Serbia run no faster than in the steam age.

Of Serbia's fellow ex-Yugoslav republics, Slovenia joined the EU in 2004, Croatia follows this July and tiny Montenegro began accession talks last year. Macedonia is a candidate, Bosnia has yet to apply and Kosovo is just starting out.

Removing Kosovo from the immediate political agenda in Serbia will free up resources for the fight to find investors and develop the economy, the theory goes.

That's providing Serbia can implement last week's accord under which a small Serb pocket of northern Kosovo will be integrated into the young state. About 50,000 Serbs there are threatening to resist.

"We're not on the cusp of a revolution," said the diplomat. "It's about neutralising it (Kosovo) as something that requires political capital. It's difficult to underestimate how significant that would be." ($1 = 0.7644 euros)

(Writing by Matt Robinson; editing by David Stamp)