Serbia: Perspectives on Eurasian integration

China’s Silk Road initiative (One Belt, One Road – OBOR) and Russia’s Eurasian Economic Union (EEU) have raised hopes in Serbia that the country might soon get much-needed infrastructure investment, strengthen its energy security, and increase its exports. The country’s expectations are economic in nature, but are also based on the very good – indeed, “special” – political relations that Serbia has with both China and Russia, in parallel with Serbia’s status as a European Union candidate country.

 

Background

Serbian politicians and businessmen hope that their country’s excellent political relations with both China and Russia can form a basis for additional economic benefits through the EEU and OBOR projects. Serbia’s special bilateral ties are inherited from the past, when, as a non-aligned country, Yugoslavia (of which Serbia was a part until 1991) was on good terms with both the West and the East. After the Cold War and the disintegration of Yugoslavia, unlike other Central and Eastern European states, Serbia strengthened its political and economic relationship with both. Russian and Chinese political support to Serbia during the 1990s military conflicts in the former Yugoslavia prevented many Western actions against it within the United Nations Security Council, and the NATO bombing was executed without the Security Council’s authorisation in 1999. Most Serbians are grateful to Russia and China for this past political support, and also for present support: both countries refuse to recognise Kosovo, a former Serbian province that unilaterally seceded in 2008.

The “special” character of Serbia’s relations with Russia and China has been formalised through bilateral agreements on strategic partnership: in 2009, with China, and in 2013, with Russia. The significance of these strategic partnerships is mostly symbolic, primarily showing goodwill towards economic cooperation on both sides. China and Russia are not Serbia’s only “strategic partners”; France and Italy are on the same list. Serbian politicians have also showed enthusiasm for developing strategic partnerships with Turkey and Germany, but no formal agreements have been signed.

Serbia’s strategic partnerships with China and Russia are not as important as cooperation with other regions. The EU is by far Serbia’s most important economic partner, accounting for two thirds of the country’s total imports and exports. Russia and China are, however, important in terms of their exports to Serbia. Russia has a share of 10.2 percent of total Serbian imports, but only 7.6 percent of Serbian exports go to Russia. In recent years, natural gas made up 70–80 percent of imports from Russia. Direct imports from China (that is, excluding international companies’ goods produced in China) amounted to $1.5 billion in 2015, which made China the fourth-biggest importer to Serbia, while Serbia’s exports to China were worth only $12.2 million in that year. China is thus 43rd on the list of Serbia’s export destinations, and there are no real possibilities for improvement in the future.

Nevertheless, the “special relations” with Russia and China have great importance for a small country like Serbia, which has managed, unlike its neighbours in the region, to become a strategic partner of two big and powerful countries. In times of economic crisis, diversification of economic cooperation is essential, and Serbia feels that its relationship with Russia and China is a move in the right direction.

The biggest specificity of Serbia’s strategic relations is the coexistence of special relations with Russia and China and its EU integration perspective. All Serbian governments in recent years have insisted that their goal of EU accession is not incompatible with good relations with Russia and China. Several years ago, former Serbian President Boris Tadic dubbed the approach a “four-pillar Serbian foreign policy”, with the pillars being the EU, the United States, Russia, and China. None of the four has so far objected in principle to this formula, and public opinion in Serbia is strongly in favour of this differentiated approach. The key question, however, is whether or rather for how long will Serbia be able to balance between the West and the East without compromising its main goal of joining the EU.

Serbia’s desire to be a kind of “liaison” between the East and the West not only is overambitious, but also has already encountered powerful challenges. As an official candidate for EU membership, Serbia is obliged to gradually align its foreign and security policies with the Union, particularly since accession negotiations were opened in January 2014. Serbia’s turn towards being a “militarily neutral” country in 2007 might not be a crucial obstacle here: several EU member states are neutral, too. However, its military cooperation with Russia has caused suspicion and criticism in the EU. In 2013, Serbia received observer status at the Parliamentary Assembly of the Russian-led Collective Security Treaty Organization. In 2014 and 2015, Serbia held several military exercises with Russia, in the context of radically worsened relations between Russia and the West, following Russia’s involvement in the Ukrainian crisis. The Serbian government did not follow the West in imposing sanctions against Russia and, additionally, it irritated many in the West by courting Russian President Vladimir Putin at the military parade in Belgrade in October 2014.

Even so, the Serbian army has much stronger ties with NATO and has held many military exercises with NATO within its Partnership for Peace (PfP) programme, ever since it became a PfP member in 2006. The imbalance in favour of NATO continued to grow in early 2016, when Serbia ratified the two-year-old Status of Forces Agreement with the alliance, which allows free NATO transport through Serbia’s territory and immunity for its personnel. Russia’s efforts since 2014 to conclude a similar type of agreement, guaranteeing diplomatic status and immunity for its personnel in the Russian-Serbian Humanitarian Centre based in Nis, have remained unsuccessful. In the context of renewed NATO interest in the Balkans, Serbia’s move has been met with harsh criticism from still marginal but increasingly important pro-Russian political forces in the country, and with an official warning from Moscow that Russia expects Serbia to stick to its proclaimed neutrality.

Economically, ties with Russia are important, not only because of Serbia’s almost complete dependence on imports of natural gas from Russia, but also because of the bilateral free trade agreement signed in 2000, which was later extended to the members of Russia’s Customs Union, Belarus and Kazakhstan. This agreement is expected to expire with Serbia’s full integration into the EU. But accession to the EU may be many years away, which is another motive for Serbia, in the meantime, to try to exploit its lucrative relations with Russia while it can.

 

Serbia, China and the Silk Road

Serbian policymakers think the OBOR initiative should be used mainly for infrastructure investments in railways and roads, which are eventually to become the basis for future growth. Serbia desperately needs China’s capital and know-how to improve its infrastructure. There are two main reasons for this: a very poor transport and energy infrastructure that has not been properly renovated for decades, and the lack of necessary investment in this area by its other main partners, the EU and Russia.

Serbia’s EU integration path has not helped much in attracting investment or aid for infrastructure from the EU and its member states. Most EU funds have so far been used for other purposes and the prospects for change are not promising. Similarly, several years ago Russia promised an $800 million credit to Serbia to renovate its railways, but only a small part of this deal has been realised so far. Highly indebted Serbia is not able to invest much from its own funds, which leaves China as the most important actual and future investor in infrastructure, in part through the special €10 billion fund it has created for Central and Eastern European countries. With its central position in the Balkans, Serbia expects to play an important role in the OBOR project, raising the current level of €1.5 billion projects it has with China to €3 billion in the near future.

China is already involved in road-building: it built a bridge in Belgrade in 2014. Two additional projects have been planned but not begun: the construction of parts of the highway between Belgrade and the Montenegrin border, and a new block in the Kostolac thermal power plant near Belgrade.

The OBOR project, however, is supposed to first concentrate on the modernisation of the 350 kilometre-long railway connection between Belgrade and Budapest. The beginning of work on the line has been postponed several times since the signing of the first memorandum of understanding on it between China, Hungary, and Serbia in November 2013. During the last summit of China with Central and Eastern European countries, in November 2015, an additional memorandum was signed, and the two-and-a-half-year construction project worth €1.1 billion is expected to begin in Serbia in 2016.

Serbian political and economic elites are expecting Chinese infrastructure investments to push new growth in the Serbian economy, but also to lead to Chinese acquisition of Serbian firms and the establishment of Chinese or joint firms in Serbia with the aim of exporting cheaper goods abroad from Serbia. Serbia is also interested in diversifying Chinese investments into textiles, agriculture, and high-tech industries, where Chinese IT giant Huawei has recently made the first successful move in Serbia.

One big project tends to overshadow all the others because of its great significance for the Serbian economy: the long-anticipated acquisition of the Serbian steel mill in Smederevo by the Chinese steel giant HBIS for €46 million in April 2016. To comply with the Stabilisation and Association Agreement it has with the EU, Serbia first had to prove that its total state aid to this enterprise up to February 2015 was not greater than half of the intended Chinese investment.

Negotiations with Chinese counterparts are also under way concerning another potential grand Chinese undertaking in Serbia: the possible acquisition of the metallurgic complex RTB Bor, another formerly important economic pillar of Serbian industry now a bankrupt consumer of state subsidies. At the end of February 2016, Chinese company Li Ten expressed interest in strategic partnership with the big producer of copper and gold for a price between $350 and 400 million.

While the political class glorifies current and potential cooperation with China, the Serbian business community has been either silent or mildly critical of such opportunities. The main objections are twofold: the low level of engagement of local companies, material, and labour force, and non-transparent tender procedures. It is far from certain, however, that after decades of deindustrialisation and neglect, Serbian companies are ready now to engage on a mass scale in big and complicated projects.

There is a strong consensus in Serbia among all relevant political and economic actors that the country should definitely be part of the OBOR project, and this view is firmly supported by the public. Serbia also contributed an original idea to the OBOR initiative, suggesting the construction – by China or with its help – of a water canal between the Danube, near Belgrade, and the Aegean Sea, near Thessaloniki. The proposal’s downside is its very high cost, and the lack of enough water in the rivers of Morava and Vardar, along which the canal is supposed to be built. No support for the project has been registered in Macedonia and Greece, but one Chinese company financed a favourable feasibility report in 2013 and another showed some interest in 2015.

 

Serbia, Russia and the EEU

With a predominantly “wait-and-see” approach, Serbian politicians and businessmen for now perceive the EEU only as an opportunity to increase Serbian exports. For this to happen, the Serbian free trade agreement with the Customs Union of Russia, Belarus, and Kazakhstan should be extended to other members of the EEU. However, there are no concrete plans for this yet, despite repeated announcements in the last few years. Everything else in connection with the EEU is reduced completely to bilateral relations with Russia, since the other EEU members are not considered important in Serbia, either politically or economically. For this reason, the level of further Serbian relations with the EEU will mostly depend on Russia’s attitude. If Russia pushes for the formal extension of the free trade area to the EEU, Serbia will have nothing against it, hoping for economic benefits. There are no signs that Russia has such ambitions at the moment, but getting Serbia formally into the EEU orbit might become important for Russia, as a symbol of the EEU’s attractiveness to non-members.

Economic deals with Russia leave considerably more freedom for Serbian companies than those with China, because of the free trade regime that Serbia has had with Russia since 2000. Serbian companies are currently hoping that they can replace some Turkish companies in the Russian market (particularly in construction) after the serious deterioration in Russian-Turkish relations in late 2015.

Due to Serbian companies’ weak export capabilities (the total share of exports in Serbia’s GDP is only 45 percent), venturing into a foreign market, including the Russian one, is anything but easy. Serbian exports to Russia are far below expectations. Exports to Russia have risen four times during the last decade, from only $225 million in 2005 to $1,065.1 million in 2013 (yearly imports from Russia have been twice that). But since 2013, they have been decreasing, by 19 percent in 2014 in comparison with the previous year, and then by another 29.7 percent in 2015. Serbia did not follow Western countries in imposing sanctions on Russia in connection with the Ukraine crisis, and so there are no Russian counter-sanctions on Serbia – but even in these favourable circumstances, the offering of Serbian exporters is far below the needs of the big Russian market. For all these reasons, much higher export volumes to the whole of the EEU or to Russia alone are hardly possible in the near future.

Serbian companies that depend on exports to Russia have, naturally, more vested interests in cooperation. But those currently more oriented to the European and other markets would welcome the opportunity to direct and increase their own exports to the EEU. So there are no divergent interests within the business community at the present time of crisis: every export destination is good, including Russia and possibly the EEU.

While it would favour increasing exports to one more regional grouping, most of the Serbian business community is not at all enthusiastic about Serbia taking formal membership in the EEU, since this would derail Serbia from its EU integration path and put an end to the economic benefits offered by Europe.

Although many Serbian politicians – including some from the incumbent government – speak emotionally and enthusiastically about Russia, those in power have never explicitly suggested EEU membership for the country. And both Serbian Prime Minister Aleksandar Vucic and Foreign Minister Ivica Dacic have explicitly denied any possibility that Serbia will become an EEU member.

Occasional public demands for Serbia’s formal membership in the EEU come, instead, from fringe political parties and nationalist organisations. Although marginal, this phenomenon carries additional political weight because Russia is very popular among Serbs, and Russia has also intensified its information campaign towards Serbia and inside it. According to all recent Serbian public opinion polls, Russia is the most popular country of all. A more detailed look at the polls reveals, however, that most people have equal interest in Serbia’s EU membership as in good relations with Russia. This means that, while Serbian citizens have clear pro-Russian sympathies, they fall short of the desire for Serbia to join the EEU.

The EEU is not a frequent topic in Serbian media but, in the last year or so, pro-Russian organisations in Serbia have been more active in demanding Serbian inclusion in the EEU. At least some of these initiatives seem to have been sponsored by Russia itself, which feels it has fertile ground for intensifying its influence in the Balkans, primarily through Serbia.

The parties of the ruling coalition of the Serbian Progressive Party (Srpska napredna stranka, SNS) share some of these sentiments, although they still officially support EU integration. A more vocal pro-Russian stance in public is to be expected after the snap parliamentary elections in April 2016, which will result in a number of parliamentary seats for nationalistic, anti-European, and extremely Russophile political parties from the opposition, who were not represented in the Serbian legislature after the last two elections in 2012 and 2014.

Serbia’s complete energy dependence on Russia will continue to play a prominent role in the agendas and priorities of every Serbian government. The present one, although it consists of former staunch nationalists and former unreserved pro-Russians (turned Europeans just a few years ago), has lately been trying to secure alternative sources for its gas imports, including through cooperation with the US. This came as a result of Russia’s cancellation of the South Stream gas pipeline in late 2014, which left Serbia in a kind of energy security limbo.

 

Conclusion

Serbia expects to gain important economic benefits from both the OBOR initiative and the EEU. While the Silk Road might possibly bring much-needed infrastructure investments, the EEU could potentially lead to bigger exports through the extension of the free trade regime with Russia to other EEU members, and to strengthened energy security too. Judging by the results so far, it is not certain that Serbia, with its economy in deep crisis, will be capable of making use of its favourable political and economic opportunities and of meeting current inflated expectations.

Serbia is currently walking a very fine line between an obvious need to cooperate closely with China and Russia, and to continue successfully its accession to the EU – proclaimed as the country’s highest priority. Strong feelings for Russia within both the population and the ruling parties will remain the main challenge, especially because of Russia’s increasing efforts to step up its influence in Serbia and through Serbia further into the Balkans.

Whether the scale will turn more towards Russia during the years of Serbia’s rapprochement to the EU depends not only on the political and economic situation in Serbia itself, but also on relations between the West and Russia, and on EU policy towards Serbia.

 

Recommendations for the EU

1. The EU must systematically address all the economic, political, and security challenges stemming from the rising influence of Russia and China in the Western Balkans. China’s OBOR and Russia’s EEU are new forms through which this influence can further grow, turning these countries into powerful competitors in the region. In order for Western Balkan countries to remain in the EU’s orbit as the key condition for a united, secure, and prosperous Europe, the EU should further include them into its transport and energy policies and funds. The EU should also step up its information campaign within the region, showing more directly the unique advantages of further EU integration for the region.
2. The EU should welcome China’s and Russia’s investments in the Balkans, as long as they contribute to the improvement of infrastructure and to the overcoming of the serious economic crisis in the region – tasks for which the EU cannot provide enough support at the moment. The EU should, however, insist that Western Balkan governments include as many EU rules and standards in Chinese and Russian projects in the region as possible, in order for them to be EU-compatible, which was not the case in the now-defunct South Stream gas pipeline.
3. Countering Russian propaganda in the Western Balkans should also be higher on the EU agenda, particularly in countries such as Serbia, where deep pro-Russian feelings among the citizens and politicians coupled with growing Russian ambitions and pressures could derail the country from EU integration. Serbian media and non-governmental organisations should get much more aid from the EU for this purpose.